All's Well That Ends Well? On the Importance of How Returns Are Achieved

37 Pages Posted: 18 Mar 2015 Last revised: 20 May 2018

See all articles by Daniel Grosshans

Daniel Grosshans

University of Zurich - Department of Banking and Finance

Stefan Zeisberger

Radboud University, Institute for Management Research; University of Zurich, Department of Banking and Finance

Date Written: August 4, 2017

Abstract

We demonstrate that investor satisfaction and investment behavior are influenced substantially by the price path by which the final investor return is achieved. In a series of experiments, we analyze various different price paths. Investors are most satisfied if their assets first fall in value and then recover, and they are least satisfied with the opposite pattern, independent of whether the final return is positive or negative. Price paths systematically influence risk preferences, return beliefs, and ultimately trading decisions. Our results enable a much more holistic perspective on a wide range of topics in finance, such as the disposition effect, risk-taking behavior after previous gains and losses, and behavioral asset pricing.

Keywords: investor satisfaction, reference points, risk tolerance, investor behavior, experimental finance

JEL Classification: D14, D81, G11

Suggested Citation

Grosshans, Daniel and Zeisberger, Stefan, All's Well That Ends Well? On the Importance of How Returns Are Achieved (August 4, 2017). Journal of Banking and Finance (2018), 87, pp. 397-410, Available at SSRN: https://ssrn.com/abstract=2579636 or http://dx.doi.org/10.2139/ssrn.2579636

Daniel Grosshans (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 32
Zürich, 8032
Switzerland

Stefan Zeisberger

Radboud University, Institute for Management Research ( email )

Nijmegen
Netherlands

University of Zurich, Department of Banking and Finance ( email )

Zürich
Switzerland

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