The Mitigating Effect of Stop-Losses for Delegated Investments on the Proneness Towards the Disposition Effect
33 Pages Posted: 1 Jul 2019
Date Written: May 1, 2019
This paper studies the behaviour of retail investors, that tend to be unwilling to make financial 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 find 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: Suggested Citation