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Do Investors Integrate Losses and Segregate Gains? Mental Accounting and Investor Trading Decisions

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  • Sonya Seongyeon Lim

    (DePaul University)

Abstract

I test whether investors' trading decisions are influenced by their preferences for framing gains and losses. I find that investors are more likely to bundle sales of losers than sales of winners on the same day, consistent with the hedonic editing hypothesis (Thaler 1985) that individuals prefer integrating losses and segregating gains. In addition, the extent to which mixed sales of winners and losers are consistent with the hedonic editing hypothesis is greater than what would be expected under random sales of stocks. These results suggest that mental accounting is likely to play a significant role in investors' trading decisions.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 79 (2006)
Issue (Month): 5 (September)
Pages: 2539-2574

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Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:5:p:2539-2574

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. Ben-David, Itzhak & Hirshleifer, David, 2011. "Beyond the Disposition Effect: Do Investors Really Like Gains More Than Losses?," Working Paper Series 2011-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Martín Egozcue & Sébastien Massoni & Wing-Keung Wong & Ri?ardas Zitikis, 2012. "Integration-segregation decisions under general value functions:"Create your own bundle — choose 1, 2, or all 3!"," Documents de travail du Centre d'Economie de la Sorbonne 12057, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  3. Arkes, Hal R. & Hirshleifer, David & Jiang, Danling & Lim, Sonya, 2008. "Reference point adaptation: Tests in the domain of security trading," Organizational Behavior and Human Decision Processes, Elsevier, vol. 105(1), pages 67-81, January.
  4. Lin, Mei-Chen & Chou, Pin-Huang, 2011. "Prospect theory and the effectiveness of price limits," Pacific-Basin Finance Journal, Elsevier, vol. 19(3), pages 330-349, June.
  5. Huang, Yu Chuan & Chan, Shu Hui, 2014. "The house money and break-even effects for different types of traders: Evidence from Taiwan futures markets," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 1-13.
  6. repec:hal:journl:halshs-00747008 is not listed on IDEAS
  7. Sunhae Sul & Jennifer Kim & Incheol Choi, 2013. "Subjective Well-Being and Hedonic Editing: How Happy People Maximize Joint Outcomes of Loss and Gain," Journal of Happiness Studies, Springer, vol. 14(4), pages 1409-1430, August.
  8. Hongyan Fang & John R. Nofsinger, 2009. "Risk Aversion, Entrepreneurial Risk, and Portfolio Selection," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 13(2), pages 25-55, Fall.

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