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Realization Utility

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Author Info
Nicholas C. Barberis
Wei Xiong
Abstract

We study the possibility that, aside from standard sources of utility, investors also derive utility from realizing gains and losses on assets that they own. We propose a tractable model of this "realization utility," derive its predictions, and show that it can shed light on a number of puzzling facts. These include the poor trading performance of individual investors, the disposition effect, the greater turnover in rising markets, the effect of historical highs on the propensity to sell, the negative premium to volatility in the cross-section, and the heavy trading of highly valued assets. Underlying some of these applications is one of our model's more novel predictions: that, even if the form of realization utility is linear or concave, investors can be risk-seeking.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14440.

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Date of creation: Oct 2008
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Handle: RePEc:nbr:nberwo:14440

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  1. Nicholas Barberis, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," Journal of Finance, American Finance Association, vol. 56(4), pages 1247-1292, 08. [Downloadable!] (restricted)
  2. Mark Grinblatt, 2001. "What Makes Investors Trade?," Journal of Finance, American Finance Association, vol. 56(2), pages 589-616, 04. [Downloadable!] (restricted)
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  3. Meir Statman & Steven Thorley & Keith Vorkink, 2006. "Investor Overconfidence and Trading Volume," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 19(4), pages 1531-1565. [Downloadable!] (restricted)
  4. Mark Grinblatt & Matti Keloharju, 2009. "Sensation Seeking, Overconfidence, and Trading Activity," Journal of Finance, American Finance Association, vol. 64(2), pages 549-578, 04. [Downloadable!] (restricted)
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  5. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October. [Downloadable!] (restricted)
  6. Andrea Frazzini, 2006. "The Disposition Effect and Underreaction to News," Journal of Finance, American Finance Association, vol. 61(4), pages 2017-2046, 08. [Downloadable!] (restricted)
  7. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Weber, Martin & Camerer, Colin F., 1998. "The disposition effect in securities trading: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 167-184, January. [Downloadable!] (restricted)
  9. Nicholas Barberis & Ming Huang, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," NBER Working Papers 8190, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Chip Heath & Steven Huddart & Mark Lang, 1999. "Psychological Factors And Stock Option Exercise," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 601-627, May. [Downloadable!] (restricted)
  11. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December. [Downloadable!] (restricted)
  12. Harrison Hong & Jeremy C. Stein, 2007. "Disagreement and the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 109-128, Spring.
  13. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross-Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, 02. [Downloadable!] (restricted)
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