Selling Losers and Keeping Winners: How (Savings) Goal Dynamics Predict a Reversal of the Disposition Effect

Abstract

A well-documented behavioral pattern guiding individuals’ investment decisions is the disposition effect, which refers to the tendency to sell winning investments too early, while holding on to losing investments too long. This bias has negative wealth consequences, as typically, individuals’ losing investments continue to underperform while their winning investments continue to outperform. Using a goal-systemic framework, the present research identifies boundaries for the disposition effect by predicting the specific conditions under which individuals’ susceptibility to this effect is reversed. Experimental results indicate that such conditions include situations when: (1) a superordinate (savings) goal is activated by a subtle prime, (2) overall progress towards a (savings) goal is negative, (3) investment opportunities have the capacity to serve alternative goals, such as self-expression, besides the maximization of financial returns, and (4) a superordinate savings goal with a clear end-state is looming close.

Keywords: Disposition effect, household finance, goal systems theory, investment decisions, savings goals

JEL Classification: G02, G11, D14