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The disposition effect in team investment decisions: Experimental evidence

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  • Rau, Holger A.

Abstract

This paper experimentally studies the disposition effects of teams and individuals. The disposition effect describes the phenomenon that investors are reluctant to realize losses, whereas winners are sold too early. Our experiments compare the investments of two-person teams to a setting where investors trade alone. We find that subjects investing jointly exhibit more pronounced disposition effects than individuals. A closer look reveals that investor teams hardly realize losses and predominately sell winners. The data suggest that decision-dependent emotions may explain the differences. That is, teams reporting high levels of regret exhibit significantly higher disposition effects than individuals.

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  • Rau, Holger A., 2015. "The disposition effect in team investment decisions: Experimental evidence," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 272-282.
    • Handle: RePEc:eee:jbfina:v:61:y:2015:i:c:p:272-282
    DOI: 10.1016/j.jbankfin.2015.09.015
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    4. Pelster, Matthias & Hofmann, Annette, 2018. "About the fear of reputational loss: Social trading and the disposition effect," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 75-88.
    5. Fochmann, Martin & Fochmann, Nadja & Kocher, Martin G. & Müller, Nadja, 2021. "Dishonesty and risk-taking: Compliance decisions of individuals and groups," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 250-286.
    6. Evans, Richard Burtis & Prado, Melissa Porras & Zambrana, Rafael, 2020. "Competition and cooperation in mutual fund families," Journal of Financial Economics, Elsevier, vol. 136(1), pages 168-188.
    7. Zhang, Xiaotao & Wang, Ziqiao & Hao, Jing & Liu, Jiubiao, 2022. "Stock market entry timing and retail investors' disposition effect," International Review of Financial Analysis, Elsevier, vol. 82(C).
    8. Gutiérrez-Nieto, Begoña & Ortiz, Cristina & Vicente, Luis, 2023. "A bibliometric analysis of the disposition effect: Origins and future research avenues," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    9. Hermann, Daniel & Mußhoff, Oliver & Rau, Holger A., 2019. "The disposition effect when deciding on behalf of others," Journal of Economic Psychology, Elsevier, vol. 74(C).
    10. Andreu, Laura & Ortiz, Cristina & Sarto, José Luis, 2020. "Disposition effect in fund managers. Fund and stock-specific factors and the upshot for investors," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 253-268.
    11. Elisabeth Vollmer & Daniel Hermann & Oliver Musshoff, 2019. "The disposition effect in farmers’ selling behavior: an experimental investigation," Agricultural Economics, International Association of Agricultural Economists, vol. 50(2), pages 177-189, March.
    12. Prado, Melissa & Evans, Richard B. & Zambrana, Rafael, 2020. "Identity, Diversity, and Team Performance: Evidence from U.S. Mutual Funds," CEPR Discussion Papers 14305, C.E.P.R. Discussion Papers.
    13. Janssen, Dirk-Jan & Li, Jiangyan & Qiu, Jianying & Weitzel, Utz, 2020. "The disposition effect and underreaction to private information," Journal of Economic Dynamics and Control, Elsevier, vol. 113(C).
    14. Martin Fochmann & Johannes Hewig & Dirk Kiesewetter & Katharina Schüßler, 2017. "Affective reactions influence investment decisions: evidence from a laboratory experiment with taxation," Journal of Business Economics, Springer, vol. 87(6), pages 779-808, August.
    15. Beatrice Boumda & Darren Duxbury & Cristina Ortiz & Luis Vicente, 2021. "Do Socially Responsible Investment Funds Sell Losses and Ride Gains? The Disposition Effect in SRI Funds," Sustainability, MDPI, vol. 13(15), pages 1-14, July.
    16. Liêu, L.M. & Pelster, M., 2020. "Framing and the disposition effect in a scopic regime," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 175-185.
    17. Niu, Xiaofei & Li, Jianbiao, 2019. "How Time Constraint Affects the Disposition Effect?," EconStor Preprints 194618, ZBW - Leibniz Information Centre for Economics.
    18. Alexia GAUDEUL & Caterina GIANNETTI, 2023. "Trade-offs in the design of financial algorithms," Discussion Papers 2023/288, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    19. van Dooren, Bono & Galema, Rients, 2018. "Socially responsible investors and the disposition effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 17(C), pages 42-52.
    20. Minh-Lý Liêu, 2021. "Peer attention and the disposition effect," Working Papers Dissertations 81, Paderborn University, Faculty of Business Administration and Economics.

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    More about this item

    Keywords

    Decision-dependent emotions; Disposition effect; Experiment; Team decision making;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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