Zuchel, Heiko () (Universität Mannheim, Graduiertenkolleg Allokation auf Finanz- und Gütermärkten)
Abstract
Why do some investors tend to ''sell winners too early and ride losers too long''? Such behavior, labeled the disposition effect, has been attributed to biases in return expectations, time-varying risk-aversion based on the value function of prospect theory, and regret theory. I review these explanations and argue that none of them is satisfactory because they either fail to capture the disposition effect or because they are not supported by emprical evidence. I point out that there is a large psychological literature on entrapment, escalating commitment, and sunk cost that studies phenomena that are very similar to the disposition effect. This literature suggests an explanation of the disposition effect based on cognitive dissonance theory.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number
01-39.
Length: 20 pages Date of creation: 29 May 2001 Date of revision: Handle: RePEc:xrs:sfbmaa:01-39
Note: I would like to thank Susanne Abele, Gunnar Görtz and Stefan Schwarz for help, the DFG for financial support through the Graduiertenkolleg . Most of this paper was written while I was visiting the Université des Sciences Sociales in Toulouse where I benefited from a hospitable research environment and financial support through the Research Training Network Contact details of provider: Postal: D-68131 Mannheim Phone: (49) (0) 621-292-2547 Fax: (49) (0) 621-292-5594 Email: Web page: http://www.sfb504.uni-mannheim.de/ More information through EDIRC