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
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: Suggested Citation