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Do the disposition and house money effects coexist? A reconciliation of two behavioral biases using individual investor-level data

Listed author(s):
  • Duxbury, Darren
  • Hudson, Robert
  • Keasey, Kevin
  • Yang, Zhishu
  • Yao, Songyao

This paper uses investor-level data to examine jointly the tendency of investors to succumb to the disposition effect and the house money effect; two behavioral biases premised on seemingly contradictory responses to prior gains/losses. We document three novel findings. First, the two effects can contemporaneously coexist in a single stock market and the majority of investors (53.5%) simultaneously succumb to both effects. Second, we demonstrate the importance of distinguishing prior outcomes across two dimensions; unrealized/realized and stock/portfolio level. Third, we find that the house money effect moderates the disposition effect, suggesting that cognitive biases need not always have negative consequences.

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File URL: http://www.sciencedirect.com/science/article/pii/S1042443114001292
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Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 34 (2015)
Issue (Month): C ()
Pages: 55-68

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Handle: RePEc:eee:intfin:v:34:y:2015:i:c:p:55-68
DOI: 10.1016/j.intfin.2014.11.004
Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

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