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An experimental analysis of the disposition effect: Who and when?

Author

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  • Cueva, Carlos
  • Iturbe-Ormaetxe, Iñigo
  • Ponti, Giovanni
  • Tomás, Josefa

Abstract

The disposition effect (DE) is a common bias by which investors tend to sell winning assets too soon and hold losing assets too long. We complement the existing evidence in three directions. First, we check whether the DE is robust to realistic features such as transaction costs and competitive payment schemes. Second, by using a gender-balanced design, we check for gender differences. Third, we search for psychological correlates of the DE. We find that the DE is positive and significant in all our treatments. We do not find significant differences across treatments, although transaction costs significantly reduce the propensity to sell both winners and losers. We find somewhat larger DE in women, but this effect is only significant in the second half of the experiment. On the other hand, women are more reluctant to sell losing assets throughout the experiment. Finally, we find that the most significant psychological predictors of the DE are difficulty recognizing one's mistakes and optimism. Subjects scoring high in these traits are less likely to sell at a loss and therefore exhibit a larger DE. Our results provide further suggestive evidence of cognitive dissonance as an important determinant of the DE.

Suggested Citation

  • Cueva, Carlos & Iturbe-Ormaetxe, Iñigo & Ponti, Giovanni & Tomás, Josefa, 2019. "An experimental analysis of the disposition effect: Who and when?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 81(C), pages 207-215.
  • Handle: RePEc:eee:soceco:v:81:y:2019:i:c:p:207-215
    DOI: 10.1016/j.socec.2019.06.011
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    Citations

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    Cited by:

    1. Şenol, Doğaç & Onay, Ceylan, 2023. "Impact of gamification on mitigating behavioral biases of investors," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    2. 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).
    3. Alexia Gaudeul & Caterina Giannetti, 2021. "Fostering the adoption of robo-advisors: A 3-weeks online stock-trading experiment," Discussion Papers 2021/275, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    4. 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).
    5. Stephen L Cheung, 2024. "A meta-analysis of disposition effect experiments," Working Papers 2024-02, University of Sydney, School of Economics.
    6. Artem Stopochkin & Inessa Sytnik & Janusz Wielki & Nataliia Zemlianska, 2021. "Methodology for Building Trader's Investment Strategy Based on Assessment of the Market Value of the Company," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 913-935.
    7. Riya Arora & Madhumathi Rajendran, 2023. "Moored Minds: An Experimental Insight into the Impact of the Anchoring and Disposition Effect on Portfolio Performance," JRFM, MDPI, vol. 16(8), pages 1-22, July.
    8. 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.

    More about this item

    Keywords

    Behavioral finance; Psychological characteristics; Gender; Cognitive dissonance;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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