What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation
We investigate whether prospect theory preferences can predict a disposition effect. We consider two implementations of prospect theory: in one case, preferences are defined over "annual" gains and losses; in the other, they are defined over "realized" gains and losses. Surprisingly, the annual gain/loss model often fails to predict a disposition effect. The realized gain/loss model, however, predicts a disposition effect more reliably. Utility from realized gains and losses may therefore be a useful way of thinking about certain aspects of individual investor trading. Copyright (c) 2009 the American Finance Association.
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Volume (Year): 64 (2009)
Issue (Month): 2 (04)
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