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The Disposition Effect does not survive disclosure of expected price trends

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  • Corneille, Olivier
  • De Winne, Rudy
  • D'Hondt, Catherine

Abstract

The disposition effect (DE) consists in investors’ preference for realizing gains over losses. One DE account suggests that this bias stems from a belief in mean-reverting prices. This account, however, was ruled out by Weber and Camerer (1998), who reported a DE when participants were presumably made aware of expected price trends. In two experiments, we revisited this widely cited study (i) by fully disclosing clear and complete information about asset price distributions, and (ii) by assessing the DE on more reliable measures. In Experiment 1, under conditions of full disclosure, a DE was replicated on Weber and Camerer (1998)’s measures but was not found on the more reliable measures. Experiment 2, which was high-powered and offered higher incentives, confirmed these findings. We conclude that the belief in mean-reverting prices cannot be ruled out as a contributing factor to DE. As additional insights, both experiments reveal that participants showed little convergence to optimal portfolio and diversified their portfolios even when diversification was sparsely effective.
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Suggested Citation

  • Corneille, Olivier & De Winne, Rudy & D'Hondt, Catherine, 2018. "The Disposition Effect does not survive disclosure of expected price trends," LIDAM Reprints LFIN 2018003, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlr:2018003
    Note: In : Journal of behavioral and experimental finance, Vol. 20, p. 80-91 (2018)
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    Cited by:

    1. 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).
    2. Bachmann, Kremena, 2024. "Do you have a choice?: Implications for belief updating and the disposition effect," Journal of Economic Psychology, Elsevier, vol. 102(C).
    3. Stephen L Cheung, 2024. "A meta-analysis of disposition effect experiments," Working Papers 2024-02, University of Sydney, School of Economics.
    4. Guenther, Benno & Lordan, Grace, 2023. "When the disposition effect proves to be rational: experimental evidence from professional traders," LSE Research Online Documents on Economics 118353, London School of Economics and Political Science, LSE Library.

    More about this item

    JEL classification:

    • G4 - Financial Economics - - Behavioral Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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