The Mitigating Effect of Stop-Losses for Delegated Investments on the Proneness Towards the Disposition Effect

33 Pages Posted: 1 Jul 2019

See all articles by Alexander Deneke

Alexander Deneke

WHU - Otto Beisheim School of Management

Sebastian Seidens

WHU - Otto Beisheim School of Management

Date Written: May 1, 2019

Abstract

This paper studies the behaviour of retail investors, that tend to be unwilling to make fi nancial decisions on their own and therefore follow other investors' strategies on online trading platforms, in particular with respect to their proneness towards the disposition effect. Therefore, we combine two mitigating effects on the proneness towards the disposition effect for signal receivers on an online trading platform, namely delegated investments and a stop-loss function. We fi nd that signal receivers undertaking delegated investment decisions on an online trading platform have a negative proneness towards the disposition effect. We further show that signal receivers on the
platform making use of a stop-loss are even less prone to the disposition effect than investors not making use of it. Thereby, we add a new investment type to the analysed asset classes of Chang et al. (2016) separated by delegation and no delegation.

Keywords: Disposition effect, cognitive dissonance, contracts for difference, investment decision behaviour, delegated investments, social trading

JEL Classification: G11, G40, G41

Suggested Citation

Deneke, Alexander and Seidens, Sebastian, The Mitigating Effect of Stop-Losses for Delegated Investments on the Proneness Towards the Disposition Effect (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3410532 or http://dx.doi.org/10.2139/ssrn.3410532

Alexander Deneke (Contact Author)

WHU - Otto Beisheim School of Management

Burgplatz 2
Vallendar, 56179
Germany

Sebastian Seidens

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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