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

35 Pages Posted: 26 May 2013  

Jaakko Aspara

Hanken School of Economics; Aalto University School of Business (formerly known as Helsinki School of Economics)

Arvid O. I. Hoffmann

University of Adelaide - Business School; Network for Studies on Pensions, Aging and Retirement (Netspar)

Date Written: May 20, 2013

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

Suggested Citation

Aspara, Jaakko and Hoffmann, Arvid O. I., Selling Losers and Keeping Winners: How (Savings) Goal Dynamics Predict a Reversal of the Disposition Effect (May 20, 2013). Netspar Discussion Paper No. 05/2013-018. Available at SSRN: https://ssrn.com/abstract=2269580 or http://dx.doi.org/10.2139/ssrn.2269580

Jaakko Aspara

Hanken School of Economics ( email )

P.O. Box 479
Helsinki, Helsinki 00101
Finland

Aalto University School of Business (formerly known as Helsinki School of Economics) ( email )

P.O. Box 21230
Helsinki, 00076
Finland

Arvid O. I. Hoffmann (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

Network for Studies on Pensions, Aging and Retirement (Netspar)

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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