近畿大学学術情報リポジトリ

全文

(1)Disposing. of the. Extant. and. Disposition. Alternative. Grzegorz Abstract. In this. zling. phenomena. called. disposition. on to their we argue. note, in. effect—the. losing. stocks. its importance. cance. for understanding. could. lead to new,. We argue. there. with. traits. search. basic. aiming. Key words May. 16, 2011. are. robust. of human. behavioral accepted. observation. finance,. that. investor. theories. stock. forces. phenomena. disposition. on one of the recently,. market winning extent. behavior,. we also. of explaining forces. that. behind. should. with. effect,. most. namely. investors stocks. to a large. capable. behavioral. behavior, market. the literature be discovered. and sell their. be overstated. fundamental. to explain. to. for too long. individual. more. survey. markets. might. Explanations. Mardyla. we critically. financial. Effect:. tend. to hold While. offer. of its signifi-. some. ideas. the disposition latter. that. be the in the spotlight. individual. investor. so-. too soon.. in terms. the. puz-. the. behavior.. psychology. that effect.. connect of re-.

(2) M9. 1.. This introductory tives of the present. M1. Introduction. section, besides stating research,. attempts. (1) What is the disposition (2) Is it important. the motivation. to answers. behind and the objec-. the following. three questions:. effect ?. and if so, why ?. (3) Is it really an "effect" ?. Empirical called. behavioral. in investor rational note. research. into. "effects". behavior. surveys. markets. the. are contrary. paradigm,. literature. to be discovered. markets. has. market. data.. in financial. that. expectations. financial. to rational. and. namely. most. identified. These. behavior. in particular,. on one of the recently,. recently. refer. the so-called. utility. by the. theory.. phenomena. disposition. so-. to regularities. as exemplified. expected puzzling. many. This. in financial. effect.. Our pur-. pose is to:. 1.. Examine. the possible. disposition. causes and existing. theories. that. aim to explain. the. effect;. 2.. Propose. new explanations. 3.. Synthesize. based on the behavioral. the above two questions. in an attempt. economics paradigm; to judge whether. the dispo-. sition effect is in fact an "effect" in the first place and debate whether serves the attention. Apparently. it has been getting.. investors. in financial. markets. ciated in price since the time of purchase to hold on to losing This asymmetry. it de-. stocks—those. in investor. in price. since purchasing.. and termed. "the dispo-. (1985).. here thus. get rid of" or "to unload" rather. depreciated. was first uncovered. sition effect" by Shefrin and Statman The word "disposition". quickly while at the same time they tend. that. behavior. tend to sell stocks that have appre-. derives. from. "to dispose. of" meaning. than from the more general meaning 98 ( 98 )—. "to. of the word.

(3) Disposing of the Disposition Effect (Mardyla) "di. sposition",. widely. namely. that. of "personal. used in the behavioral. very interesting ambiguous. finance. that the literal. and possibly. temperament" literature. definition. misleading.. (investor). of the disposition. If its definition. insights. from examinations. Coming back to the main story, stock market. investors. "sentiment".. It is. effect is in itself so. of and actual viability. proper is allowed to be arbitrary. expect any meaningful. or more. Even before delving deeper into the analy-. sis, this fact casts the first doubt on the robustness effect.. or "propensity",. of the. to such an extent, can we. of the effect ?. the disposition. effect is the observation. tend to hold on to their losers. that. for too long and sell their. winners too soon. However, what do "too long" and "too soon" really mean here ? From the perspective the changes. in investor. the disposition and around. attitudes. expected utility (towards. effect should occur around. have varying. purchase. theory,. risk—risk. there is no reason why. aversion). needed to explain. the time of the stock purchase. the time of the decision to sell.. tors usually distinct. of standard. Bearing. wealth levels, different. decision. in mind that different. starting. prices, can we really unambiguously. positions. inves-. on stocks and. state when it is "too soon". to sell or when it is "too long" to hold on to a stock ?. These and related Perhaps. the disposition. tablished. patterns. rational,. and it provides. doubts. serve as the main motivations. effect is a robust behavioral. in human. decision-making. valid implications. case, we should indeed carefully its applicability. to financial. However, the disposition a temporary "di. figment. scovers" an interesting. phenomenon. processes, for real-world. examine its mechanisms. markets. behind this paper. based on well-es-. no matter. rational. markets—if. or ir-. this is the. and dutifully. investigate. and beyond.. effect might just as well be another. in the financial. economics. research. fad or "anomaly". landscape:. puzzle, which leads others to wonder whether. someone they could. also observe it and maybe even solve it, the debate is fascinating. as it heats up;. hundreds. of papers. surveying. analyzing. immense. are written amount. proposing. new elegant. of field data, designing 99 ( 99 )—. theories,. new laboratory. and. experiments,.

(4) M9 and so on. all a trick human. But what than. could. behavior. ?. 2.. Extant. We divide empirical. if there easily. Then. be explained fuss. behind. with. is really. of the existing. of the. disposition. analyses.. We only. about. namely. explaining. the. nounced. to be.. 2.1.. Empirical. behavioral. material. bias. the. on the topic. We will survey. literature. of evidence for the apparent. into. focuses on the asymmetry point in time.. paper by Shefrin and Statman of the holding. fined benchmark.. period of winners. effect. has. been. pro-. research. in this. findings.. Majority. of the. behavior though. In our survey, we choose to not differentiate. while in itself not being an absolute. winners. quickly. of a series of decibased on it to be. at any given point in time.. Based on mutual. evidence of the disposi-. effect should lead investors. but hold on to their. 100 ( 100 )—. to some well-de-. that the holding time,. is a result. first tentative. that the disposition. in. in ques-. choice variable,. in the US, they offered. relatively. the. logic behind the problem. it all is Shefrin and Statman(1985).. They suggested. (including. between. Also, we remark. to those based on the behavior. data. for winning. explicitly. sions to buy, sell, or hold and thus we would expect any results. The paper that started. of the disposition. and robust. and losers relative. of its manifestation.. alize their. main. experi-. (1985)), focus instead on the difference. tion is independent. tion effect.. sections:. motivation,. our. Some studies. as we believe the underlying. fund trading. three. to. in investor. the two approaches. highly correlated. of. and. existence. here only the most prominent. and losing stocks at a certain. the length. traits. explanations,. disposition. vein, along with some of the newest and less orthodox. original. if it is. Findings. There is a mountain. empirical. What. Explanations. relevant. that. ?. nothing.. theoretical. works. "effect". and unquestionable. and. effect,. mention. the. basic. Research—Findings. mental. effect.. is no substance. all the. our survey. evidence. M1 '61-. to re-. losing stocks for an.

(5) Disposing of the Disposition Effect (Mardyla) extended period of time for all months Statman. (1985) claim investors. of self-control.. Thus,. negative-return the realization chological. recognize. the. tax. benefits. as a measure. of getting. even though. they are reluctant. rid. of. to do so due to psy-. In effect, these December sales are trades. the previous months. Shefrin and. (In the US, the end of the year poses a deadline for. of such losses.). reasons.. sell their losing stocks in December. investors. investments. of the year except December.. of the year when investors. postponed. from all. did not want to realize any finan-. cial losses. Lakonishok and Smidt tence of the disposition. (1986) were next in line to offer evidence for the exis-. effect.. find that shares turnover. They examine. is positively. (but seasonally). changes, which is one of the implications cember this correlation. is significantly. ing before the year-end. deadline.. The first major study providing done by Odean. (1998).. He studies. quired from a large brokerage followed between years. Odean. January. trading. evidence in support. 10,000 individual. 1987 and December. investor. 1993, that. the month of December.. accounts. data. ac-. these accounts. are. realize. unprofitable. For an entire year, investors. trad-. of the effect was. is, for a total. investors. rate than their. Again, in De-. with tax-related. house in the US: in his analyses,. at a much higher. with past price. effect.. weaker, consistent. strong. of US stocks and. correlated. of the disposition. (1998) does indeed find that individual. stock investments. volume. of seven profitable. ones, except in. in his report. would realize. 14.8 percent of their gains, but only 9.8 percent of their losses, that is, gains were realized 50 percent more frequently traders. than losses.. These findings. and across time. One of the most appealing. is that it leads to suboptimal. return. performance.. this with his data: the stocks sold by the individual formed the stocks they bought. by 3.32 percent. are robust across. points of the disposition. effect. Indeed, Odean (1998) confirms investors. in his sample outper-. over the subsequent. trading. period. examined. Hence, his work is the first to suggest market-wide by affecting. phenomenon. that the disposition. capable of contributing. supply in that investors -. effect might be a. to price and volume variability. who are averse to selling for a loss cause a re101 ( 101 )—.

(6) M9 duction. in the supply of potential. vocates that the behavior. M1 '61-. sellers.. characterized. by the disposition. to be motivated. by a desire to rebalance. higher trading. costs of low priced stocks.. Grinblatt. and Keloharju. losses significantly. again, consistent. with the disposition. price. site—they. are prone to buying. average.. Still, all groups. houses, government study. stock. The authors. ways:. institutional. past performance,. of investors,. including. and individuals,. and the magnitudes. to incur the. market. investors logit mod-. of the latter. investors. financial. react to. investors. but individuals. exhibit. stocks—. also examine the behav-. stocks with past performance. institutions. groups: the probability. or by a reluctance. and find that different. in heterogeneous. likely to buy shares with favorable. their. effect.. ad-. effect does not appear. lower the tendency to sell individual. groups of investors data. the author. 1996. They find, using an estimated. el, that financial. past stock. portfolios. (2001) look at the Finnish. and their behavior in 1995 through. ior across different. Also, and importantly,. are more. do the oppo-. that is below market groups and brokerage. the disposition. are very similar. effect in. across. different. of selling a losing stock is about half of that for a winning. stock.. As far as other few worth. empirical. mentioning. presently.. found in Coval and Shumway in the futures. examinations. market. Strong. noon while at the same time ended up their morning. trading Mann. weaker experience. scene.. greater. sessions profitably.. risks Another. among institutional. effect. They find that. those. compared. in their study.. than among. This finding is supported. (2005), who find in their study of 300 professional 102 ( 102 )—. in the after-. with traders. supporting. The disposition. investors. makers. the disposition. (2001), this time also for both institutional in Israel.. a. effect is. of market. session, will place more trades. assume. vestors active on the stock market nificantly. microstructure. the morning. describe. evidence for the disposition. on the Chicago Board of Trade—thus. who lose money during. and Venezia. we briefly. (2005), who look at the behavior. finds its way even into the market. Shapira. are concerned,. who. study is that of and individual. in-. effect is however siginvestors. with less. in turn by Locke and. future. traders. active at.

(7) Disposing of the Disposition Effect (Mardyla) the Chicago. Mercantile. Exchange. stocks for the longest. that. for shorter. supporting. evidence for the disposition. though,. disposition. It thus appears cial markets fering. such evidence. are actually. hold los-. Choe and Eom (2009) find market;. more volume, and higher. inter-. value of trades. effect is a pervasive. Evidence to the contrary is O'Connell. hardly. exchange. more likely to sell a currency to the disposition. in finan-. exists: the only study of-. and Teo (2009)—they. in foreign. occurrence. study. markets. the behavior. and find that. of. traders. after a loss than after a gain, which is. effect.. Theory. In this plaining. section,. we critically. the mechanisms. there. are. bling. the disposition. many. an asymmetric. way,. theories. theory,. here on those ior, in other. Traditional. those. candidate. volves. around. in is defined. appeal most. stocks. attribute. to basic. here. compared disposition. of human. in their. at ex-. that. in a manner. expectations.. traits. parsimonious. to act. too often. the. return. We note. aimed. as over-tendency. and too firmly. theories. theories. while resem-. to behave. or too quickly. in and. to what. the norma-. effect. to prospect. We put emphases. decision-making. method. and most. behavgeneral. in. and applicability.. finance. theory. are influenced. simple. for people. reversion-related. that. significant effect.. of winning. too long. Most. theories. relevance. ticipants. i.e. to dispose. or mean. words,. reasons. the latter. stocks. the most. the disposition. rational. effect,. suggest.. regret,. survey. behind. perfectly. to hold on to losing. their. traders. effect in the Korean futures. trading,. hold losing. effect in their study.. investors. in stark opposition. 2.2.. More recently,. that the disposition. worldwide.. large institutional. tive. time periods.. more frequent. indicate a weaker. traders. periods of time, while the more successful. ing stocks. estingly. the less successful. by the. idea for the. notion. suggests interplay. an immediate of mean. that. actual. between. decisions risk. explanation. reversion. in stock. 103 ( 103 )—. and of the. made by market expected. return.. disposition. returns.. effect. Accordingly,. parOne reif.

(8) M9. M1 '61-. prices come back to some mean trend or value, negative to be expected for winning pected for losing stocks. the core of Kahneman predicts. asymmetric. comes risk-loving averse). stocks and positive returns This argument. and Tversky's attitudes. after experiencing. in the future. in the future. are. are to be ex-. connects well with the value function—. (1979) prospect. towards. returns. theory.. The value function. risk after losses and after. losses but risk-averse. gains: one be-. (or rather,. more risk-. after realized gains:. Utility. Losses. ........--+. i -x. Gains. +X. ) Disutility. Let us first review a recent as a candidate ditionally,. point in the value function.. that refutes. the prospect. effect, one by Kaustia. stock in question Prospect. theory. (2010).. was purchased argues. theory Traserves. that the pro-. to sell a stock should decline as the stock price moves away from the pur-. chase price in either contrary: but rather turns. project. for the disposition. the price at which the relevant. as a reference pensity. explanation. research. direction.. the propensity it is increasing. Kaustia. (2010) finds. empirical. evidence. to the. to sell a stock does not decline as gains or losses increase or constant. in the domain of losses.. in the domain of gains and insensitive. In other words, there is a discontinuity 104 ( 104 )—. to re-. (a "jump").

(9) Disposing of the Disposition Effect (Mardyla) in the investors' are zero.. attitudes. This finding. 3 years, though. towards. selling exactly at the point where capital gains. is found to be statistically. it monotonically. (2010) parameterizes. prospect. that it cannot predict. the pattern. that the disposition. weakens. significant. as the time period lengthens.. theory's. S-shaped. value function. of realized returns. effect is unlikely. for periods of up to Kaustia. and concludes. found in the data and hence. to be driven by preferences. dictated. by pros-. (2009) propose a new theory. in which. pect theory. In a related investors. work, Barberis. do derive. (dis)utility. nore paper gains and losses. ior of an investor applies prospect profits:. and Xiong. from realized The authors. with prospect theory theory. to annual. after purchasing. gains and losses but completely. study theoretically. preferences. the trading. in two settings.. (not necessarily. realized). the stock at the beginning. stock-level. trading. of the year, over the course of. trades the stock, and, at the end of the year, receives. pect theory). based on his trading. sion that for a significant that investors. range of parameter. will be more inclined. with prior gains — exactly In their. second setting,. the authors. This theory. (pros-. leads to a conclu-. values, the prospect. theory. predicts. to sell stocks with prior. losses than stocks. the opposite to what the disposition. effect is all about.. prospect. losses and indeed, this theory ues of the parameters;. profit.. behav-. The first one. the year an investor utility. ig-. theory. is defined over only realized. predicts a disposition. effect, although. for some, the opposite prediction. conclude that investor. preferences. and. not for all val-. still materializes.. distinguish. gains. Hence,. between paper and real-. ized gains.. While prospect theory the disposition posed other control.. trait. effect, the pioneering ingredients. The combination. fect, according. research. as well: mental. considerations. of Shefrin and Statman. accounting,. regret. aversion,. Regret. aversion. under uncertainty,. of. (1985) proand self-. of the four factors would account for the disposition. to the authors.. of decision-making. disposition. has been the main focus in theoretical. ef-. being the most widely accepted. we turn next to its relevance for the. effect. 105 ( 105 )—.

(10) M9 Regret. is usually. a different. M1. defined as a negative. choice from the one actually. This leads to an interesting ior and experienced fact, although. emotion evoked by the knowledge. made would have led to a better. interpretation. utility/emotions:. involving regret. it can be in principle. a dynamic. before. periences a feeling of blame for having made a suboptimal. portfolio. and Volkmann. to more closely examine regret Their model captures folio returns Muermann's an investor. and feelings. who regrets. after. A decision-. dynamic. two-asset preferences. for the disposition. optimal response. an investment. effect.. to realized port-. and pride implied by such realized. (2007) argument. the. choice.. and pride in individual. dynamically. of regret. and Volkmann's. regret. as a possible explanation. an investor's. of behav-. after the fact and ex-. (2007) develop a theoretical. choice model that incorporates. pattern. an action.. maker thus compares a realized outcome to some alternative. Muermann. outcome.. can only be experienced. anticipated. that. returns.. rests on the simple intuition. that. in a stock that has lost value will hold the. stock because he hopes that the stock price will rise in the next period, enabling him to avoid regret. wants. Asymmetrically,. to feel pride in having. if the stock has risen in value, the investor. made a good decision and sells the stock; if he had. held it and then the price fell, he would have foregone affect.. As with prospect. which the feelings but those conditions. No formal reversion. and pride are compatible. are not robust. with the disposition. under effect,. to model variations.. simple thesis that a belief in mean effect.. would have to believe that winning. For such a theory. to hold. stocks will have in the future. than losing stocks or, in the financial economics lingo, that there ex-. ists a negative. autocorrelation. the realms hand,. this positive. do find specific conditions. in stocks can explain the disposition. lower returns. other. of regret. the authors. modes exist for the apparently. water, investors. within. theory,. experiencing. there. of existing is no clear. of returns. theories, evidence. Such a belief can hardly. both traditional that. investors. reversion.. 106 ( 106 )—. be justified. and behavioral.. On the. do not believe. in mean.

(11) Disposing 2.3.. Effect. (Mardyla). Experiments. Neither. empirical. the disposition able in such tory. of the Disposition. literature. effect because settings.. experiments,. made. to extant some. where. evidence. participants.. of the. pect theory prices.. We discussed. consequently we think. in their. section.. to calculate. The theory. that subjects. theory. make the subjects. to stochastic Participants. behavior. are clearly. environments in the experiment. ex-. pros-. probabilities were. and they had ample staneeded.. of the prospect. 107 ( 107 )—. (1998) found. because the subjects. values whenever. uncertainty. that shares. the stock market. misperceive. meets the eye: primitive. under. respond. puzzling. in favor. Flip-. above and thus proceed to. of price changes. appropriate. kind of be-. invoke two possibilities: governing. but. profits.. for the disposition. theories. is more to it than. know about,. experiment. theory-related. (1998) is particularly. experiment. On top of that,. what Weber and Camerer. probabilities. about the probabilities. and insightful.. proposing. in the following. trend in prices, meaning. of future. nisms of decision-making. prising. from. attention. before. which the subjects. authors. prospect. reject the latter. there. effect. subjects. participants,. explanation.. knowledge. inferred. considerable. disposition. As far as possible explanations. in Weber and Camerer. tistical. devote. to subjects'. is exactly. and misperception. clearly informed. indirectly. laboraprocesses. from selling falling shares—such. and harmful. experiment. inspect the latter. at least. effect behavior:. in price paths,. not be sold; yet, that. by their. and executed. when the price fell than when the price rose.. is clearly suboptimal. hibited. are unobserv-. (1998) were the first to search for and indeed find experi-. in general abstained. their subject did.. of explaining. decision-making. explanations. ping the coin, rising prices imply an upward should. designed. We thus. and complementary,. involves trends. still, participants. then. is capable mechanisms. of human. or elicited,. of the disposition. sold fewer shares. modeling behavioral. workings. investigations. Weber and Camerer. havior. intrinsic. by experiment. new, alternative. their setting. the underlying. observed. experimental. mental. theoretical. Hence the need for carefully. can be if not directly choices. nor. The authors. theory.. psychological. However, mecha-. at work here and they. in ways that are both surby Weber and Camerer.

(12) M9 (1998) are evidently. an example. back to this problem. of those. in the next section. tions for the disposition A follow-up. M1 '61mechanisms. where we propose. study to that of Weber and Camerer. istence of the disposition. traders. that. In a bold departure extent external. from extant. explanations. effect relates. measures. the extent. enced by a decision-maker.. in Chui's. of the disposition. aware. of their. attributes. in a financial. competitive. cus of control.. While we applaud Chui's. traits. behavior. of human. gard his explanation mechanism. arbitrary.. offers many much more general on the present. issue.. internal—. Rotter. (1966).. of any event experimight feel they This assumption is small and. confirms. and in individual. themselves. effect-related. personality. the existence. data, even control-. feature,. could be unmanner. and. namely the lo-. to invoke psychological. in order to try and explain the disposition. to be somewhat. some light. the author. (2001) initiative. to be only a partial. the. type, which indeed is the case. in a disposition. this premise to the above-mentioned. namely. in the market. He points out that investors to behave. he evaluates. market. events).. of participants. effect, both in the aggregate. tendency. factor,. when. trend in prices.. by the psychologist. Down to the results,. ling for the mean reversion.. disappear. of the phenomenon,. (of stochastically-ruled. is not of the perfectly. (2001) setting.. should. of feelings on the control. might only make sense if the number. studies the ex-. or downward. to a personality. Thus traders. are in control of the outcomes. thus the market. explana-. for the belief in mean reversion.. belief in mean reversion. locus of control — a trait put forward. This attribute. come. (1998) using a very similar. in time about a possible upward. the disposition. alternative. He experimentally. effect while controlling. the unjustified. are informed. shall. effect.. setup was carried out in Macau by Chui (2001).. He argues. at work—we. effect, we re-. one and his choice of the psychological The large body of research. theories Again,. of behavior we shall. in psychology. that could potentially come back to those. shed in the. following. Fogel and Berry. (2006) relate. an experimental. setting.. omission. commission. versus. the disposition. The authors. effect to anticipated. regret. in. posit they wanted to "examine the role of. with respect. to holding. 108 ( 108 )—. losers and selling. winners"..

(13) Disposing of the Disposition Effect (Mardyla) Here, holding. on to losing stocks is an act of "omission". the respective. counteract. also compare. in the case of winning. the impact of counterfactual. gree of regret that greater. experienced. regret. to play. reported. a prominent. regret. decisions,. enough, or for selling a winning. thetical. situations. field and experiment. data. are uncorrelated. to their. a strong. tate, while others are particularly. to the disposition. This means. we perhaps. that. attitudes financial. plicit in the disposition. to explain the disposition. limited.. (2008) use both. towards losses.. effect is truly. financial. Hence, they an "effect" ar-. behavioral. biases.. Trad-. stocks quickly are not necessarily. selling earlier. In other words, some tradthan normative. theories. dic-. keeping losing stocks for longer. (2008) also find that individual experience.. as stable. Therefore,. personality theories. effects akin. The authors. find that. the inherent. peculiarity.. traits. and accordingly. if we strive to find out what asymmetry. effect might not be a phenomenon. a population-wide. stakes in. effect are not only random but stable on an individual. both biases. effect.. is necessarily. as two separate. should look for two unconnected. drives the disposition. but rather. towards. effect decrease with trading. both sides of the disposition level.. investors'. biased towards. Weber and Welfens. were based on hypo-. Weber and Welfens. to sell winning. biased towards. does ap-. all respondents. did not have any financial. the disposition. classified. Regret. While this finding seems strong. who hold on to their losing stocks.. ers are predominantly. They hypothesize. almost. by the authors. study,. reactions. tendency. on the de-. either for not selling a losing stock soon. to show that. guing that it should be rather. than optimally.. experiments:. power of these results. first offer some doubt as to whether. the same traders. subjects.. conducted. In a more recent very interesting. ers exhibiting. by their. and what is more, subjects. the outcome; thus the predictive. gains. to real outcomes. stock too soon.. enough on its own, the experiments. (2006). evoke feelings of relief.. role in their. for investment. Fogel and Berry. stocks.. with an actual loss than with an opportu-. nity cost, and that missed losses should pear. being. outcomes. and anticipated. should be associated. with "commission". on an individual. This puts our problem. effect in a whole new light and necessitates. ideas and methods. 109 ( 109 )—. of behavior. imlevel. of attempting new research.

(14) M9 Other experimental inherent. therein. research. reference. M1. has so far mainly focused on prospect theory. point examinations.. est in this survey, we only briefly mention of literature ditional. that relevant. insights. Gneezy's theory's. S-shaped. i.e. those conducive to providing. involves shifting. value function. to search. the risk behavior.. use the historical. what surprising intuitive. some of the major works in this strand. into the logic and causes of the disposition. losses influence pants. As these are not our main inter-. to our motivation,. (2005) experiment. candidate. be due to the specific experimental. a different. for a reference. by the rational. an interesting. might. an investor in it.. may. Gneezy. the risk attitude,. theory. and losses of a stock are equal in their. purchasing. in their study: The purchasing. the original. as represented. but in by the. proportion. of investors. when the participants. are grouped. defined by appropriate. reference points.. doubt on the robustness markets.. by prior performance other than reference. setting:. of the disposition. They also note that. winner. of. and loser point. as being related to individual driven variable.. effect, the authors. are affected. according. the number. They use two reference. price proxy is a market. overall evidence for the disposition. that only a certain. in that. price and last period transaction. price proxy is interpreted. havior here while the last transaction. research. some-. This result. the trade. experiment. proxies. financial. partici-. theory.. of equal size.. sides finding. that. and. seen as the most. for instance,. reenter. stocks go up or down in increments. price.. price.. that prior gains and losses do influence. Oehler et al. (2003) present possible gains. level in prospect. level—a finding. price was traditionally. design, though:. way from that predicted. expected utility. the reference. out in his experiment. sell her stock at any time, but then she cannot (2005) concludes. effect.. peak of the process as a reference. and indeed, obvious,. ad-. for evidence on how prior gains. It turns. given that the purchase. and. Be-. also point out. by the disposition. to different. be-. benchmarks,. effect. the latter. Thus Oehler et al. (2003) cast additional effect as a prevailing investor. behavior. as well as by prior price paths.. behavioral. is strongly. This indicates. bias in. influenced that factors. points only are at work and calls for a more comprehensive. agenda capable of addressing -. these problems unambiguously. 110 ( 110 )—. This diffi-.

(15) Disposing of the Disposition Effect (Mardyla) cult task could only be achieved experimentally, Vlcek and Wang that investor finding. (2007) conduct. another. use their initial wealth. to be attributable. to "the house money effect":. if dynamic. other losses, while gains are treated. as an isolated. riencing. a string. of gains.. Experimental. research. on the disposition. to potential. among economists further. that. progress. there are areas of research. the. psychology that. we briefly. effect. patterns. of human. of civilizations well-defined. nance. could. it is worth. and all patterns. 3.1.. and. theories. and as such,. we believe. well-established. wherein. without. re-. consensus experiments. Discussion. venture. These. have in all probability. gress the. section,. disposition. biases barely be-. would be severely impaired.. 3.. In this. people inte-. already some persuasive. already. from. losses after expe-. effect and related. the. The ar-. independent. in this respect:. gun, but as we can see from the above considerations, This proves. but could be possibly rec-. incident,. asymmetrically. gains and are thus more tolerant. have been obtained.. to take more. are taken into account.. grate consecutive. sults. the. This effect, due to Thaler and Johnson. considerations. here is that each loss is treated. and conclude. point and suggest. a tendency. to be in conflict with the prospect theory. onciled with the latter gument. series of experiments. levels as a reference. risk after a gain and less risk after a loss. (1990) appears. if at all.. to propose. proposals. are. two alternative. mostly. based. behavior—patterns. necessarily technology.. that. evolved. through. All of them. explanations. for. on well-documented. in. are time. are much. of decision-making. under. prove. to unambiguously. looking. to be difficult deeper. into. the. uncertainty. human. psyche. robust, along more. simple with. the. general. or behavioral test. and prothan fi-. them.. Still,. to understand. any. of our behavior.. Denial. Denial, self-deceit,. and unjustified -. rationalization 111 ( 111 )—. are widespread. modes of be-.

(16) M9 havior,. both on individual. M1 '61-. as well as group. level.. Adam Smith. observes:. "He is. bold who does not hesitate to pull off the veil of self-delusion which covers from his view the deformities of his own conduct." in his "Theory essential. and pragmatic. to admit it or not.. Rational. ties of life: death,. three forms: (1) rational,. nological,. to reject. exemplified. represented. outlook on life.. means. of such mindsets. worst" . Such optimism way.. Thus, accentuating. downplaying of history. denial of the. in a skewed view In effect, the best. might well turn out to be holding on to losing stocks resulted. counterpart. in subsequent. of the disposition that. we form simplified. our models.. breaks. models of reality. not only rejecting. but also going out of our way to find other evidence that 112 ( 112 )—. effect need not be the effect alto-. reader is referred. This, in the psychology. which implies. positive returns.. (2008).. For a more complete theory of denial, the interested. dissonance",. the possibility. of the future.. much like in the work of Weber and Welfens. to "cognitive. Yet this could be. on the one hand and. Then, we end up with an explanation. dence that contradicts. fu-. returns. implied here.. He suggests. or not. yet in an asymmetric. "selling winners". (1957).. we tend. history,. The respective. inger. common. Even though. on the other, results. expectation. because such cases in the past usually. gether,. and (3) tech-. The "technological". "ignoring. to market. returns. in a distorted. response to such a scenario. engage in.. past successes/positive. past failures/negative. and further. way of think-. addiction. such as cancer.. for the best" while. often appeals. comes in. with our interest,. include tobacco. end-. to risky,. (2011), denial. our decision horizons.. traders. reali-. the crushing. will turn up" axiom of a rather. out to be inconsistent. disposition. "hoping. disasters,. by the "I don't want to know" attitude,. examples. we care. the cruel, inescapable. to Offer. to know or hear about a fatal disease. essentially. life, whether. by the "It's not really happening". by the "Something. what apparent. Denial is an. Denial is a way of responding. ture is at risk, we deny it by shortening exactly. towards. us against. According. If evidence turns. it: typical. wanting. future.. typified. Sentiments".. and environmental. to name but a few.. and ambiguous. ing, (2) emotional,. of our attitude. denial protects. illness, natural. ing of love, taxes, uncertain,. component. of Moral. to Fest-. and refute. evi-. literature,. gives rise. conflicting. evidence,. confirms. our intrinsic.

(17) Disposing models. of the Disposition. Effect. (Mardyla). of the world.. 3.2.. Absence. The. and Presence. disposition. should perhaps level of gains. effect. being. ask ourselves. that. presence. phenomenon,. The human. brain. surrounds. is wired in. that are than of the. we perceive and interpret. that. we. lies deeper than only at the. we notice more of the things. of anything. or cognitive. This reasoning. by traders.. In other words,. and absence. asymmetric. the asymmetry. and losses experienced. are not.. meta-physical,. inherently. whether. such a way that by necessity things. an. us, whether. asymmetrically in the physical,. realm.. could be applied to explain the disposition. effect.. If gains are. perceived more clearly than losses, then action is taken more often following former.. The behavioral. esses that facilitate. economics. action, and largely. The presence/absence. asymmetry. who puts disproportionate. on proc-. the processes. that inhibit. action.. a gain than after experiencing "gain indicator". in the popular. much like the disposition. asymmetry. as discussed. psychology. literature,. lieve that in the context recognized tudes. information. dence for the above is documented and. Tversky. (1992).. to take action on the los-. To. gain. resulting. in Gilbert. in an asymmet-. (2007).. recently. However, we be-. effect, it can be reconciled with a well. under uncertainty, strength. by Peterson intuition. gains.. effect.. notably. of differing. the. "loss indicator". above has received some coverage. of the disposition. bias in decision-making. toward. on when-. or will not do so as often as in case of financial. Absence of gain would thus serve as an action inhibitor,. Attention. switch turned. In such. is ahead, thus leading to action—selling. absence of gain will not propel the investor. ric action pattern. a loss.. However, if there is no corresponding. ing stocks in his portfolio,. An investor. to gains as opposed to losses would arguably. ever one of the stocks in his portfolio. in his brain,. focused. ignored. brain, there is an intrinsic. stock to realize that gain.. has traditionally. is an example of such a process.. attention. act more often after experiencing an investor's. literature. the. and weight. and Pitz. about. 113 ( 113 )—. namely. what. asymmetric Experimental. attievi-. (1988) as well as Griffin constitutes. information.

(18) M9 strength. and. information. exercise: high-strength, of fair coin tosses low-strength,. weight,. consider. low-weight. information. coin tosses with a small difference with. 10 heads).. the. information. with the same results. high-weight. coin tosses. M1 '61following. is represented. weight,. Conversely,. typically. consists. between the number. When the strength. While this argument explaining sounds. particularly. sustained, tionately. the absence/presence emphasize. gains. If an investor asymmetry. consequently. The negative. and again. of the theory. is of low strength. ignores. and high. making. for a theory. (some). choices. capable of. asymmetry. it. losses his stocks. would then cause him to dispropor-. leading. to his subjective. loss side of the disposition. need two sides to it.. (e.g. 17. and thus should be inclined to. information. information—information. (as in the case of denial). of. is high and its. effect, coupled with the absence/presence. convincing.. while. number. of heads and tails. and hence prone to postpone. being full of high-strength/low-weight gains.. of a large. by itself might serve as a candidate. the disposition. by a small number. of information. when available information. people are underconfident. coin-tossing. (e.g. 3 coin tosses with 3 heads),. weight is low, people are found to be overconfident take action.. simple. set. about incoming. effect is as a result. we end up with an explanation. downplayed that does not. This time, the "holding on to losers" part is the one left out. and the disposition. effect itself ceases to some degree to be an asym-. metric phenomenon.. 3.3.. Conclusion. We offer. now some. concluding. disposition. effect. importance. is overplayed. on real "b. financial. ehavioral. bias". forces. behind. tal. forces. that. phenomena nent,. should with. as observed. markets. supply. forces. be the individual. in empirical. to a large. is likely it,. remarks.. We do not dispute data. extent.. While. and demand. an exaggeration. that. connect. in the. spotlight. behavior.. exists.. it is vital. We trust. there. basic. research. for sure. 114 ( 114 )—. traits aiming along. that. we posit. to analyze. claiming. of research. More. However,. balances,. with. the fact. the. that. its. its effects. it to be a robust. are more. fundamen-. of human. behavior,. to explain these. lines. market is immi-.

(19) Disposing. of the Disposition. Effect. (Mardyla). References. Barberis, N., and W. Xiong (2009), "What Drives the Disposition Effect ? An Analysis of a Long-Standing Preference-Based Explanation," Journal of Finance, 64, pp. 751-784. [ 2 : Choe, H., and Y. Eom (2009), "The Disposition Effect and Investment Performance in the Futures Market," Journal of Futures Markets, 29, pp. 496-522. Study of the Disposition Effect: C3 : Chui, P. M. W. (2001), "An Experimental Evidence from Macau," Journal of Psychology and Financial Markets, 2, pp. 215-221. ( 4 : Coval, J. D., and T. Shumway (2005), "Do Behavioral Biases Affect Prices ?" Journal of Finance, 60, pp. 1 -34. C5 ; Festinger, L. (1957), A Theory of Cognitive Dissonance, Stanford University Press. C6 : Fogel, S., and T. Berry (2006), "The Disposition Effect and Individual Investor Decisions: The Roles of Regret and Counterfactual Alternatives", Journal of Behavioral Finance, 7, pp. 107-116. C7 : Gilbert, D. (2007), Stumbling on Happiness, Vintage Books. Evidence", ( 8 : Gneezy, U. (2005), "Updating the Reference Level: Experimental in R. Zwick and A. Rapoport (eds.), Experimental Business Research, Vol. III, pp. 263-284, Springer. C9 ; Griffin, D., and A. Tversky (1992), "The Weighing of Evidence and the Determinants of Confidence," Cognitive Psychology, 24, pp. 411-435. [10: Grinblatt, M., and M. Keloharju (2001), "What Makes Investors Trade ?" Journal of Finance, 56, pp. 589-616. (11: Kahneman, D., and A. Tversky (1979), "Prospect Theory: An Analysis of Decision under Risk." Econometrica, 47, pp. 263-291. (12: Kaustia, M. (2010), "Prospect Theory and the Disposition Effect", Journal of Financial and Quantitative Analysis, 45, pp. 791-812. J., and S. Smidt (1986), "Volume for Winners and Losers: [13: Lakonishok, Taxation and Other Motives for Stock Trading", Journal of Finance, 41, pp. 951 -974 . Trader Discipline and [14: Locke, P. R., and S. C. Mann (2005), "Professional Trade Disposition", Journal of Financial Economics, 76, pp. 401-444. (15: Muermann, A., and J. M. Volkmann (2007), "Regret, Pride, and the Disposition Effect", Working Paper, The Wharton School, University of Pennsylvania. K., Lager, V., and Oberlander, M. (2003), "CoexisC16: Oehler, A., Heilmann, tence of Disposition Investors and Momentum Traders in Stock Markets: Ex[ 1:. perimental Evidence", Journal of International Financial Markets, Institutions & Money, 13, pp. 503-524. "Self-Control and the Future of Capitalism", [17: Offer, A., 2011 (forthcoming), in K. Almqvist and A. Linklater (eds.), On Capitalism, Stockholm: Axson Johnson Foundation. Investors, Past Per[18: O'Connell P. G. J., and M. Teo (2009), "Institutional formance, and Dynamic Loss Aversion", Journal of Financial and Quantitative Analysis, 44, pp. 155-188. 115 ( 115 )-.

(20) M9. h.'- 1. Odean, T. (1998), "Are Investors Reluctant to Realize Their Losses ?", Journal of Finance, 53, pp. 1775-1798. and the [20; Peterson, D. K., and G. F. Pitz (1988), "Confidence, Uncertainty, Use of Information", Journal of Experimental Psychology: Learning, Memory, and Cognition, 14, pp. 85-92. for Internal versus External [21: Rotter, J. (1966), "Generalized Expectancies Control of Reinforcement", Psychological Monographs, 80, pp. 1 –28. (22: Shapira, Z., and I. Venezia (2001), "Patterns of Behavior of Professionally Managed and Independent Investors", Journal of Banking and Finance, 25, pp. 1573 –1587 . (1985), "The Disposition to Sell Winners Too (23: Shefrin, H., and M. Statman Early and Ride Losers Too Long: Theory and Evidence", Journal of Finance, 40, [19;. pp. 777-790. Thaler, R. H., and E. J. Johnson (1990), "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice", Management Science 6, pp. 643-660. (25: Vlcek, M., and M. Wang (2007), "The Disposition Effect in the Lab", Working Paper, University of Zurich. (26: Weber, M., and C. F. Camerer (1998), "The Disposition Effect in Securities Trading: An Experimental Analysis", Journal of Economic Behavior and Organization, 33, pp. 167-184. (27: Weber, M., and F. Welfens (2008), "Splitting the Disposition Effect: Asymmetric Reactions Towards Selling Winners" and "Holding Losers", Working Paper, University of Mannheim. (24:. 116 ( 116 )—.

(21)