Information and context matter: debiasing the disposition effect with lasting impact

Lingxi Huang and Benno Guenther

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The disposition effect is one of the most prominent and widely studied behavioral biases observed among investors. It describes the tendency to close out winning investments prematurely while holding on to losing ones for too long and is generally associated with reduced investment returns. Researchers have explored various debiasing strategies and interventions to mitigate the disposition effect and its detrimental impact on returns. We summarize a between-subject experiment with n = 132 UK participants testing the impact of an informational feedback-like intervention to mitigate the disposition effect, informing participants about the disposition effect. Moreover, we re-examine our intervention's impact in the follow-up measurements which are two weeks and again three months after the first measurement. We find our intervention to have a significant impact, reducing the disposition effect in the first measurement. In addition, we still find a significant impact of the intervention, reducing the disposition effect after two weeks, while no significant impact is observed at the three-month point.While we find a higher disposition effect to be associated with lower returns for one measurement, the opposite is true for the other two measurements. Moreover, the intervention had a return reducing impact for one measurement and no significant impact for the other two. Overall, our study shows a promising intervention that may be readily deployed among retail investors with a somewhat lasting impact to mitigate the disposition effect. However, our study also shows that the relationship between the disposition effect and investment returns is nuanced.

Keywords: disposition effect; behavioral finance; trading biases; retail investors; investment decision-making; REF fund (search for similar items in EconPapers)
JEL-codes: J1 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2024-04-11
New Economics Papers: this item is included in nep-cbe and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Frontiers in Behavioral Economics, 11, April, 2024, 3. ISSN: 2813-5296

Downloads: (external link)
http://eprints.lse.ac.uk/122579/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:122579

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager (lseresearchonline@lse.ac.uk).