Investors’ Decision To Trade Stocks – An Experimental Study
This paper experimentally examines the behavior of investors when buying and selling stocks. This behavior was tested under different conditions, among them restrictions on asset holdings or different information conditions. Basic financial theory suggests that subjects buy and sell according to expectations regarding the future prices of assets. On the other hand, behavioral biases, such as the disposition effect, suggest that subjects are affected by past performance of assets. In a series of experiments, subjects were asked to allocate a given endowment among six assets. All the assets had the same normal distribution. The results show that when subjects were not restricted regarding the number of assets they were allowed to hold and were given information only on the asset they hold, the holding time for losing and winning assets was the same, indicating that there was no effect of past performance. On the other hand, when subjects were required to hold three assets at all times and replace one asset on each round, they tended to sell losing assets too soon and hold winning assets too long. The results also show that subjects who are given information on market returns tend to sell winning assets (relatively to the market) too soon and hold losing assets too long.
|Date of creation:||2007|
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- Philip Brown & Nick Chappel & Ray Da Silva Rosa & Terry Walter, 2006. "The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes-super-," International Review of Finance, International Review of Finance Ltd., vol. 6(1-2), pages 43-78.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
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- Weber, Martin & Camerer, Colin F., 1998. "The disposition effect in securities trading: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 167-184, January.
- Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July.
- Bremer, Marc & Kato, Kiyoshi, 1996. "Trading Volume for Winners and Losers on the Tokyo Stock Exchange," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 127-142, March.
- Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
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