Unraveling the Disposition Effect: The Role of Prospect Theory and Emotions

50 Pages Posted: 27 Nov 2007 Last revised: 14 Apr 2012

See all articles by Barbara Summers

Barbara Summers

University of Leeds - Faculty of Business; University of Leeds - Division of Management

Darren Duxbury

Newcastle University Business School

Date Written: August 1, 2007

Abstract

This paper investigates experimentally the role of emotions in a robust behavioral anomaly, the disposition effect. We manipulate choice and responsibility for subsequent gains and losses, thus influencing the anticipated and experienced emotions at play. Merely experiencing a gain or loss, in the absence of responsibility, is not sufficient to produce a disposition effect, thus supporting recent theoretical claims that prospect theory alone can not explain the disposition effect. Introducing the emotions of rejoicing or regret, via choice and responsibility, is sufficient to produce a disposition effect. We conclude that emotions have an important role to play in economic decisions.

PLEASE NOTE: The final outcome of this line of work, with additional studies, is now in-press for OBHDP online.

Keywords: disposition effect, emotion, regret, rejoicing, active/passive choice, experimental

JEL Classification: G10

Suggested Citation

Summers, Barbara and Duxbury, Darren, Unraveling the Disposition Effect: The Role of Prospect Theory and Emotions (August 1, 2007). Available at SSRN: https://ssrn.com/abstract=1026915 or http://dx.doi.org/10.2139/ssrn.1026915

Barbara Summers (Contact Author)

University of Leeds - Faculty of Business ( email )

Leeds LS2 9JT
United Kingdom

University of Leeds - Division of Management ( email )

United Kingdom

Darren Duxbury

Newcastle University Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom
+44(0)191 208 1517 (Phone)

HOME PAGE: http://www.ncl.ac.uk/nubs/staff/profile/darren.duxbury

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