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Disposition Effect and Diminishing Sensitivity: An Analysis Based on a Simulated Experimental Stock Market

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  • Youki Kohsaka
  • Grzegorz Mardyla
  • Shinji Takenaka
  • Yoshiro Tsutsui

Abstract

The authors experimentally investigate the existence of the disposition effect and its relationship with diminishing sensitivity. Their approach includes 3 key characteristics: (i) an environment closely resembling actual stock markets, (ii) individual-specific reference prices, and (iii) a direct test of diminishing sensitivity as a correlate of the disposition effect. They find strong support for the existence of the disposition effect as an independent hypothesis. This is an improvement over previous studies, which tested this hypothesis only jointly with others. The authors' results also strongly point to diminishing sensitivity, of the type postulated by prospect theory, being positively associated with the disposition effect.

Suggested Citation

  • Youki Kohsaka & Grzegorz Mardyla & Shinji Takenaka & Yoshiro Tsutsui, 2017. "Disposition Effect and Diminishing Sensitivity: An Analysis Based on a Simulated Experimental Stock Market," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 18(2), pages 189-201, April.
    • Handle: RePEc:taf:hbhfxx:v:18:y:2017:i:2:p:189-201
    DOI: 10.1080/15427560.2017.1308941
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    2. Vanessa Martins Valcanover & Igor Bernardi Sonza & Wesley Vieira da Silva, 2020. "Behavioral Finance Experiments: A Recent Systematic Literature Review," SAGE Open, , vol. 10(4), pages 21582440209, November.
    3. Shoko Yamane & Hiroyasu Yoneda & Yoshiro Tsutsui, 2020. "Is Homo Economicus An Ideal to be Pursued? Using US and Japan Survey Data," Asian Economic Journal, East Asian Economic Association, vol. 34(4), pages 357-378, December.

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    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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