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Portfolio framing and diversification in a disposition effect experiment

Author

Listed:
  • Cheung, Stephen L.
  • Rogut, Nathan

Abstract

We experimentally test an intervention designed to reduce investors’ disposition effect by prompting them to identify their worst asset, from the standpoint of its impact on future portfolio performance. We find that this intervention is mildly effective, and significantly more so for participants who correctly identify their worst asset, and/or sell the asset they identify. We also find that participants who correctly understand diversification in a financial literacy questionnaire exhibit larger disposition effects in the experiment. The latter finding raises concerns over the external validity of standard experimental paradigms used to study the disposition effect.

Suggested Citation

  • Cheung, Stephen L. & Rogut, Nathan, 2024. "Portfolio framing and diversification in a disposition effect experiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 44(C).
    • Handle: RePEc:eee:beexfi:v:44:y:2024:i:c:s2214635024001126
    DOI: 10.1016/j.jbef.2024.100997
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    More about this item

    Keywords

    Behavioural finance; Portfolio choice; Disposition effect; Diversification;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

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