Is the Disposition Effect Related to Chronic Individual Investor Differences in Emotion Regulation and Reliance on System 1 or System 2 Processes?

28 Pages Posted: 15 Feb 2014 Last revised: 6 Mar 2018

See all articles by Daniel W. Richards

Daniel W. Richards

RMIT University - School of Accounting and Law

Mark P. Fenton-O'Creevy

Open University, UK

Janette Rutterford

The Open University - Business School

Devendra G. Kodwani

The Open University, UK

Date Written: October 10, 2017

Abstract

We investigate the relationship between susceptibility to the disposition effect (DE) and chronic individual differences in reliance on System 1 or System 2 processes and habitual emotion regulation strategies. Using UK stock market investors’ trading records, we measure their susceptibility to the DE. An online questionnaire was used to assess these investors’ reliance on System 1 and System 2 processes and use of reappraisal and expressive suppression emotion regulation strategies. Investors with higher reliance on System 1 processes have greater DE but reliance on System 2 processes is not related to the DE. Use of reappraisal strategies to regulate emotions whilst investing reduces the DE, but use of expressive suppression does not show reduction of this bias. These results suggest that investors’ intuitive emotional reactions to gains and losses explain susceptibility to the DE, and that effective methods of regulating emotions enable this bias to be overcome.

Keywords: Disposition effect, dual-process theory, emotion regulation, financial decision-making bias, behavioral finance

JEL Classification: D81, D1, G11, G2

Suggested Citation

Richards, Daniel and Fenton-O'Creevy, Mark P. and Rutterford, Janette Marie and Kodwani, Devendra G., Is the Disposition Effect Related to Chronic Individual Investor Differences in Emotion Regulation and Reliance on System 1 or System 2 Processes? (October 10, 2017). Journal of Economic Psychology, Forthcoming; Asian Finance Association (AsianFA) 2014 Conference Paper. Available at SSRN: https://ssrn.com/abstract=2396513

Daniel Richards (Contact Author)

RMIT University - School of Accounting and Law ( email )

124 La Trobe Street
Melbourne 3000
Australia

HOME PAGE: http://www.rmit.edu.au/contact/staff-contacts/academic-staff/r/richards-dr-daniel

Mark P. Fenton-O'Creevy

Open University, UK ( email )

Walton Hall
Milton Keynes, Buckinghamshire MK7 6AA
United Kingdom

Janette Marie Rutterford

The Open University - Business School ( email )

Walton Hall
Milton Keynes, MK6 7AA
United Kingdom
00441908655812 (Phone)
00441908655898 (Fax)

Devendra G. Kodwani

The Open University, UK ( email )

Milton Keynes, MK6 7AA
United Kingdom

HOME PAGE: http://www.open.ac.uk/oubs

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