House Money, Counterfactual and the Disposition Effect

34 Pages Posted: 31 Aug 2009

See all articles by Shean-Bii Chiu

Shean-Bii Chiu

Department of Finance, National Taiwan University

Pei-Gi Shu

Fu-Jen Catholic University - Department of Business Administration

Han-Yu Jian

affiliation not provided to SSRN

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

Chiu, Shean-Bii and Shu, Pei-Gi and Jian, Han-Yu, House Money, Counterfactual and the Disposition Effect (August 1, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1464598 or http://dx.doi.org/10.2139/ssrn.1464598

Shean-Bii Chiu (Contact Author)

Department of Finance, National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

Pei-Gi Shu

Fu-Jen Catholic University - Department of Business Administration ( email )

510, Zhongzheng Rd.
Xinzhuang Dist.
New Taipei County, 24205
Taiwan

Han-Yu Jian

affiliation not provided to SSRN

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