House Money, Counterfactual and the Disposition Effect
34 Pages Posted: 31 Aug 2009
Date Written: August 1, 2009
Abstract
We explore an issue of whether prior experience of sold stocks would affect the disposition effect, an inclination of selling winners than losers. We use the prior realized gain to serve as the proxy of house money and find that individual investors become more risk seeking (adverse) when they were harbored by a prior gain (loss) and therefore decrease (increase) the disposition effect. Moreover, we trace the ex-post return of the previously sold stock to capture the counterfactual learning effect. The counterfactual effect makes individual experiences regret (happiness) when the ex-post price trends up (down), and the sense of regret (happiness) will reduce (increase) the subsequent disposition effect. Using the Cox proportional hazard model to estimate the disposition effect we find that house money effect has a stronger impact than the counterfactual effect on the disposition effect. We further close up the analysis on individual characteristics and find house money and counterfactual effect differently on the disposition effect.
Keywords: Disposition Effect, House Money Effect, Counterfactual, Cox Proportional Hazard Model
Suggested Citation: Suggested Citation
Do you want regular updates from SSRN on Twitter?
Recommended Papers
-
Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors
By Brad M. Barber and Terrance Odean
-
Volume, Volatility, Price, and Profit When All Traders are Above Average
-
The Common Stock Investment Performance of Individual Investors
By Brad M. Barber and Terrance Odean
-
Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment
By Brad M. Barber and Terrance Odean
-
By Brad M. Barber and Terrance Odean
-
By Simon Gervais and Terrance Odean
-
By Mark Grinblatt and Matti Keloharju