The Role of Beliefs in Trading Decisions
22 Pages Posted: 24 May 2017 Last revised: 1 Mar 2018
Date Written: February 22, 2018
Abstract
We provide evidence that people fail to consistently incorporate their beliefs into trading decisions. The results of our laboratory experiment show that selling decisions are much less belief-driven than buying decisions. Interestingly, this difference is entirely driven by selling decisions in the presence of paper losses for which we observe that the belief-sensitivity is reduced by half. Selling decisions for paper gains are as sensitive to beliefs as buying decisions. Additionally, we find that people have more optimistic beliefs in face of a loss than when their position is at a gain.
Keywords: Behavioral Finance, Experimental Finance, Individual Investors, Trading Behavior, Belief Formation
JEL Classification: G11, G17
Suggested Citation: Suggested Citation
