Carmen Lee () (Marketing Department, VU University Amsterdam) Roman Kraeussl () (Finance Dept., VU University Amsterdam) André Lucas () (Finance Dept., VU University Amsterdam) Leonard J. Paas () (Marketing Dept., VU University Amsterdam)
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The disposition effect postulates that individuals hold losing investments too long. However, many investors eventually sell at a loss. This paper integrates prospect theory, reference point adaptation and cognitive-experiential self-theory to provide more insight on such investor’s capitulation. We empirically study the contribution of each component as well as their inter-relationships in two dynamic experiments. Consistent with utility maximization, we find a major effect of positive expectations. Second, a larger total loss size and a longer time in a losing position are related to a downward shift in the reference point. The dynamically adapting reference point indirectly increases the probability to capitulate. Also, a recent loss leads to more negative emotions, which also indirectly increases the probability to capitulate.
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