Behavior in a Simplified Stock Market: The Status Quo Bias, the Disposition Effect and the Ostrich Effect

Annals of Finance, Forthcoming

24 Pages Posted: 23 Apr 2007 Last revised: 10 Oct 2008

See all articles by Alexander L. Brown

Alexander L. Brown

Texas A&M University - Department of Economics

John H. Kagel

Ohio State University (OSU) - Economics

Date Written: August 3, 2007

Abstract

Specific behavioral tendencies cause investors to deviate from optimal investing. We investigate three such tendencies in a simplified stock market. Subjects rarely follow the fully profit-maximizing strategy, most commonly by ignoring information and continuing to hold on to a stock regardless of its performance. The results support the predictions of the status quo bias, but not the ostrich effect or the disposition effect. These deviations cost subjects a substantial portion of their potential earnings.

Keywords: behavioral finance, experimental economics, status quo bias, self-signaling

JEL Classification: C91, D01, D53, D83

Suggested Citation

Brown, Alexander L. and Kagel, John H., Behavior in a Simplified Stock Market: The Status Quo Bias, the Disposition Effect and the Ostrich Effect (August 3, 2007). Annals of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=981500

Alexander L. Brown (Contact Author)

Texas A&M University - Department of Economics ( email )

4228 TAMU
College Station, TX 77843-4228
United States
979-862-8084 (Phone)
979-847-8757 (Fax)

HOME PAGE: http://econweb.tamu.edu/abrown/

John H. Kagel

Ohio State University (OSU) - Economics ( email )

1945 North High Street
Columbus, OH 43210-1172
United States

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