27 Pages Posted: 6 Feb 2013 Last revised: 27 Jan 2014
Date Written: November 1, 2013
The disposition effect refers to the empirical fact that investors have a higher propensity to sell risky assets with capital gains compared to risky assets with capital losses, and it has been associated with low trading performance. We use a stock trading laboratory experiment to investigate if it is possible to reduce subjects’ tendency to exhibit a disposition effect by making information about a stock’s purchase price, and thus about capital gains and losses, less salient. We compare two experimental conditions: a high-saliency condition in which the purchase price of a stock is prominently displayed by the trading software, and a low-saliency condition in which it is not displayed at all. We find that individuals exhibit a disposition effect in the high-saliency condition, and that the effect is 25% smaller in the low-saliency condition. This suggests that it is possible to debias the disposition effect by reducing the saliency with which information about a stock’s purchase price is displayed on financial statements and online trading platforms.
Keywords: disposition effect, investor attention, household finance, realization utility
JEL Classification: G11
Suggested Citation: Suggested Citation
Frydman, Cary and Rangel, Antonio, Debiasing the Disposition Effect by Reducing the Saliency of Information about a Stock's Purchase Price (November 1, 2013). Journal of Economic Behavior and Organization, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2212494 or http://dx.doi.org/10.2139/ssrn.2212494