Cut Your Losses and Let Your Profits Run: How Shifting Feelings of Personal Responsibility Reverses the Disposition Effect

Journal of Behavioral and Experimental Finance, pp. 18-24, Forthcoming

21 Pages Posted: 2 Nov 2015

See all articles by Jaakko Aspara

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

Date Written: November 2, 2015

Abstract

The disposition effect refers to individuals’ tendency to sell their winning investments too early, while holding on to their losing investments too long. This behavioral bias has negative consequences for individuals’ wealth, because losing investments usually continue to underperform, while winning investments typically continue to outperform. The present research demonstrates that shifting feelings of personal responsibility can reverse individuals’ susceptibility to the disposition effect. In particular, results from three experiments indicate that the disposition effect is reversed when (i) prior investment gains are attributed to external factors while prior investment losses are attributed to individuals’ own faults, (ii) individuals invest someone else’s money instead of their own, and (iii) when individuals have an alternative, socially oriented investment goal, such as self-expression besides a financial gains goal. The results have implications for financial service professionals, such as financial advisors.

Keywords: Behavioral Finance, Disposition Effect, Household Finance, Individual Investors, Investment Decisions

JEL Classification: G02, G11, D14

Suggested Citation

Aspara, Jaakko and Hoffmann, Arvid O. I., Cut Your Losses and Let Your Profits Run: How Shifting Feelings of Personal Responsibility Reverses the Disposition Effect (November 2, 2015). Journal of Behavioral and Experimental Finance, pp. 18-24, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2685095

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

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