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Disposition Effect and Diminishing Sensitivity: An Analysis Based on a Simulated Experimental Stock Market

Author

Listed:
  • Kohsaka Youki

    (Center for Finance Research, Waseda University)

  • Grzegorz Mardyla

    (Faculty of Economics, Kinki University)

  • Shinji Takenaka

    (Japan Center for Economic Research)

  • Yoshiro Tsutsui

    (Graduate School of Economics, Osaka University)

Abstract

We experimentally investigate the existence of the disposition effect and diminishing sensitivity as its potential cause. Our approach includes three key characteristics: (i) An environment closely resembling actual stock markets; (ii) Individual-specific reference prices; (iii) A direct test of diminishing sensitivity as a cause of the disposition effect. We find strong support for the existence of the disposition effect as an independent hypothesis. This is an improvement over previous studies, which tested this hypothesis only jointly with others. Our results also strongly point to diminishing sensitivity, of the type postulated by prospect theory, being a source of the disposition effect.

Suggested Citation

  • Kohsaka Youki & Grzegorz Mardyla & Shinji Takenaka & Yoshiro Tsutsui, 2013. "Disposition Effect and Diminishing Sensitivity: An Analysis Based on a Simulated Experimental Stock Market," Discussion Papers in Economics and Business 13-02-Rev.2, Osaka University, Graduate School of Economics, revised Sep 2014.
    • Handle: RePEc:osk:wpaper:1302r2
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    References listed on IDEAS

    as
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    Cited by:

    1. Vanessa Martins Valcanover & Igor Bernardi Sonza & Wesley Vieira da Silva, 2020. "Behavioral Finance Experiments: A Recent Systematic Literature Review," SAGE Open, , vol. 10(4), pages 21582440209, November.
    2. Shoko Yamane & Hiroyasu Yoneda & Yoshiro Tsutsui, 2020. "Is Homo Economicus An Ideal to be Pursued? Using US and Japan Survey Data," Asian Economic Journal, East Asian Economic Association, vol. 34(4), pages 357-378, December.
    3. Sarmiento, Julio & Rendón, Jairo & Sandoval, Juan S. & Cayon, Edgardo, 2019. "The disposition effect and the relevance of the reference period: Evidence among sophisticated investors," Journal of Behavioral and Experimental Finance, Elsevier, vol. 24(C).

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    More about this item

    Keywords

    disposition effect; diminishing sensitivity; investor behavior; experimental economics;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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