# A reexamination of the disposition effect

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```					A Reexamination of the
Disposition Effect
James Eaves
Department of Finance
Université Laval
The Disposition Effect
 Tendency   to sell winners too soon and
hold losers too long (Shefrin and Statman,
1985).
 Lots of evidence from the field.
 Prospect theory is often used (informally)
to explain the disposition effect.
and risk-loving in loss domain.
The Disposition Effect
 Which  do you prefer?
 Choice 1:
 Lottery with a 50/50 chance of winning

\$20 or \$0.
Accept a certain \$10 payment.
 Choice 2: “Which do you prefer”
A lottery with a 50/50 chance of losing
\$20 or \$0.
 Accept a certain \$10 loss.
A Graphical Illustration
A Graphical Illustration

Trader faces “Choice 1” and is, thus, more
likely to sell.
A Graphical Illustration

Trader faces “Choice 2” and is, thus,more
likely to “buy the lottery” – hold their position.
Weber and Camerer (1998)
experiment for the disposition effect
 First
 Results:
   60% of shares sold following gains and 40%
sold following losses
   Upward price trends generate more sales
than downward price trends
   Average profit per share sold is greater than
average profit per share held
 Disposition   effect was strong and costly
Criticisms of Experiments
1.       Participants don’t have viable alternative
     Barberis and Xiong (2009), Hens and Vlcek
(2005) illustrate that disposition effect is
based on an ex-post story.
2.       Students are more likely to make
3.       Students have a different psychological
relationship with money.
Students perceptions of money
 Thefollowing concepts are positively
correlated with age (Tang (1992, 1993)) :
   Money is “good”
   Money represents achievement
   Money brings respect
   Money provides freedom and power
   Idea that we should manage our budget
carefully
Experiment
    Objective: Redo Weber and Camerer’s
experiment with the following
modifications:
1.   Give students 9 hours to make trades
2.   Offer a reasonable risk-free asset
3.   Incentivize using class-points
Experiment Design
 Asset A: had a 65% chance of going up
each period and a 35% chance of going
down
 B: 55% / 45%

 C and D: 50% / 50%

 E: 45% / 65%

 F: 35% / 65%

 Participants did not know which asset had
which distribution.
Experiment Design
 Both  groups endowed with 10000 trading
units (\$): \$1000 = 1 point : max loss = 2
points; max gain = 5.
 Group 1: 36 participants. Riskless asset
yielded 2 points. 5 minutes between trades.
 Group 2: 155 participants. Riskless asset
yielded “status quo” and losses were real. 9
Price series

Price series

Most promising possibilities
Results
 Students who bought the risk-free asset:
(2 bonus points for Group 1 and the
“status quo” for Group 2:
 Group 1: 13 students (36.1%)

 Group 2: 22 students (14.2%)
Results
Results
Results
Weber and Camerer’s disposition coefficients
Results
Alternative disposition coefficient:
Results

Weber and Camerer’s estimate = 0.30
The correlation between disposition
coefficients and profits
α           αs         γ LIFO        γFIFO

Group 1

Pear. Cor.        0.153        0.108        0.290          0.364
p-value           0.532        0.660        0.229          0.125
Group 2

Pear. Cor.       -0.243       -0.220       -0.013          0.038
p-value           0.011        0.022        0.890          0.699
Yellow indicates significance at (at least) the 10% level.
Conclusion
 Participants display a much weaker
disposition effect.
 Group 2 sold more shares at a gain than a
loss but this had no significant impact on
revenues (Reported in full paper).
 Weber and Camerer’s disposition coefficient
is insignificant, but its magnitude is negatively
correlated with profit.
 A weak “disposition effect” can have rational
explanations.
Results
Results
Disposition coefficient: Distribution for
Group 1
Disposition coefficient: Distribution for
Group 2

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 views: 20 posted: 6/8/2012 language: pages: 26