Speculating in Gains, Waiting in Losses: A Closer Look at the Disposition Effect

31 Pages Posted: 6 Mar 2008 Last revised: 10 Mar 2014

See all articles by Tõnn Talpsepp

Tõnn Talpsepp

Tallinn University of Technology

Martin Vlcek

University of Zurich - Swiss Banking Institute (ISB)

Mei Wang

WHU - Otto Beisheim School of Management

Date Written: March 10, 2014

Abstract

Investors tend to hold losing stocks too long and sell winning stocks too soon, which is referred to as the disposition effect. Using the trading data from Estonian stock market as well as the laboratory experiments, we find that investment decisions depend on the current performance and the past price movement. In the experiment, the participants appear to stay with their last period allocations if they had losses on investments, whereas they follow more active contrar- ian strategies if they had made positive profits. The trading behavior of investors in Estonian stock market are mostly consistent with our experimental results, i.e., contrarian strategies in gains and holding stocks in losses. Our experiment suggests that the risk attitude in losses, together with wishful thinking and misperception of the price process, such as gambler’s fallacy, may attribute to the observed disposition effect.

Keywords: Disposition effect, prospect theory, portfolio choice, experimental finance

JEL Classification: D01, D14, D81, G11, G12

Suggested Citation

Talpsepp, Tõnn and Vlcek, Martin and Wang, Mei, Speculating in Gains, Waiting in Losses: A Closer Look at the Disposition Effect (March 10, 2014). Available at SSRN: https://ssrn.com/abstract=1101627 or http://dx.doi.org/10.2139/ssrn.1101627

Tõnn Talpsepp (Contact Author)

Tallinn University of Technology ( email )

Akadeemia tee 3
Tallinn, Harju 12618
Estonia

Martin Vlcek

University of Zurich - Swiss Banking Institute (ISB) ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland

Mei Wang

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallender, 56179
Germany

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