Investment transparency and the disposition effect

Danbolt, Jo; Eshraghi, Arman; Lukas, Marcel

doi:10.1111/eufm.12329

Cited by 10 publications

(4 citation statements)

References 87 publications

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“…The study's findings indicate that the disposition effect has a noteworthy impact on the decision-making process of investors. The results obtained are in line with prior investigations conducted in the domain, thereby reinforcing the idea that the disposition effect has a pivotal impact on the formation of investment choices (Costa Jr et al, 2023;Danbolt et al, 2022).…”

Section: Discussionsupporting

confidence: 88%

UNLOCKING THE INVESTMENT PUZZLE: THE INFLUENCE OF BEHAVIORAL BIASES & MODERATING ROLE OF FINANCIAL LITERACY

Khan,

Hassan,

Islam

2023

JSRD

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This study aims to investigate the influence of behavioral biases on investors' investment decisions and explore the moderating role of financial literacy in this relationship. Research adopts quantitative approach, utilizing a survey questionnaire distributed among a sample of individual investors actively trading in Pakistan stock exchange. Survey assesses prominent behavioral biases like overconfidence, disposition effect, risk-aversion bias, and herding behavior, while measuring participants' level of financial literacy. Findings of study proves significant impact of behavioral biases on investors' decisions. Respondents validate prevalence of shared biases, including overconfidence, disposition effect, risk-aversion bias, and herding behavior. These biases tend to influence the decision-making process of investors, leading to suboptimal investment choices. Results suggest that financial literacy plays moderating role in linking behavioral biases and investment decisions. The implications of findings suggest importance of promoting financial literacy amid investors over guidance and support of financial professionals, ultimately improving quality of investment decision-making.

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Section: Discussionsupporting

confidence: 88%

UNLOCKING THE INVESTMENT PUZZLE: THE INFLUENCE OF BEHAVIORAL BIASES & MODERATING ROLE OF FINANCIAL LITERACY

Khan,

Hassan,

Islam

2023

JSRD

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“…Individuals tend to evaluate regular investments less ambiguously and prefer to hold in for longer despite losing positions. Under a less transparent environment, the disposition effect worsens (Danbolt et al, 2022). Investors perceive less transparent conditions as ambiguous situations, which leads to uncertainty for their investment.…”

Section: Framing Effect and Disposition Effect 883mentioning

confidence: 99%

Framing effect and disposition effect: investment decisions tools to understand bounded rationality

Kiky,

Atahau,

Mahastanti

et al. 2024

RBF

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PurposeThis paper aims to explore the development of investment decision tools by understanding the rationality behind the disposition effect. We suspect that not all disposition decisions are irrational. The decisions should be evaluated based on the bounded rationality of the individuals’ target and tolerance level, which is not covered in previous literature. Adding the context of individual preference (target and tolerance) in their decision could improve the classic measurement of disposition effect.Design/methodology/approachThe laboratory web experiment is prepared to collect the responses in holding and selling the stocks within 14 days. Two groups of Gen Z investors are observed. The control group makes a decision based on their judgment without any system recommendation. In contrast, the second group gets help inputting their target and tolerance. Furthermore, the framing effect is also applied as a reminder of their target and tolerance to induce more holding decisions on gain but selling on loss.FindingsThe framing effect is adequate to mitigate the disposition effect but only at the early day of observation. Bounded rationality explains the rationality of liquidating the gain because the participants have reached their goal. The framing effect is not moderated by days to affect the disposition effect; over time, the disposition effect tends to be higher. A new measurement of the disposition effect in the context of bounded rationality is better than the original disposition effect coefficient.Practical implicationsGen Z investors need a system aid to help their investment decisions set their target and tolerance to mitigate the disposition effect. Investment firms can make a premium feature based on real-time market data for investors to manage their assets rationally in the long run. Bounded rationality theory offers more flexibility in understanding the gap between profit maximization and irrational decisions in behavioral finance. The government can use this finding to develop a suitable policy and ecosystem to help beginner investors understand investment risk and manage their assets based on subjective risk tolerance.Originality/valueThe classic Proportion Gain Realized (PGR) and Proportion Loss Realized (PLR) measurements cannot accommodate several contexts of users’ targets and tolerance in their choices, which we argue need to be re-evaluated with bounded rationality. Therefore, this article proposed new measurements that account for the users’ target and tolerance level to evaluate the rationality of their decision.

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“…Another set of recent research deals with the impact of the disposition effect. For example, Danbolt et al (2022) provided evidence of the decline in disposition effect when trading activity and stock holding become public. Similarly, social interaction reduces the disposition effect as it reduces uncertainty levels for investors (Jin et al , 2021).…”

Section: Thematic Analysismentioning

confidence: 99%

“…Shefrin and Statman (1985) established that the disposition effect is mainly led by emotional factors, where traders take pride in holding winning stocks. The phenomenon mainly exists because of a bias called mental accounting (Danbolt et al , 2022), which states that investors use reference prices to make decisions instead of their actual gains and losses (Thaler, 1985). Apart from emotional factors, some of the possible drivers of the bias include cognitive dissonance (Altanlar et al , 2019), (Chang et al , 2016), belief-based trading (Ben-David and Hirshleifer, 2012), investor demographics and socio-cultural factors (Zhang et al , 2022).…”

Section: Introductionmentioning

confidence: 99%

Shed old baggage and invest wisely. A bibliometric and thematic analysis of disposition effect and investment

Mundi

Vashisht

2023

QRFM

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Purpose This paper aims to review, systematize and integrate existing research on disposition effect and investments. This study conducts bibliometric analysis, including performance analysis and science mapping and thematic analysis of studies on disposition effect. Design/methodology/approach This study adopted a thematic and bibliometric analysis of the papers related to the disposition effect. A total of 231 papers published from 1971 to 2021 were retrieved from the Scopus database for the study, and bibliometric analysis and thematic analysis were performed. Findings This study’s findings demonstrate that research on the disposition effect is interdisciplinary and influences the research in the domain of both corporate and behavioral finance. This review indicates limited research on cross-country data. This study indicates a strong presence of work on investor psychology and behavioral finance when it comes to the disposition effect. The findings of thematic analysis further highlight that most of the research has focused on prospect theory, trading strategies and a few cognitive and emotional biases. Practical implications The findings of this study can be used by investors to minimize their biases and losses. The study also highlights new techniques in machine learning and neurosciences, which can help investment firms better understand their clients’ behavior. Policymakers can use the study’s findings to nudge investors’ behavior, focusing on minimizing the effects of the disposition effect. Originality/value This study has performed the quantitative bibliometric and thematic analysis of existing studies on the disposition effect and identified areas of future research on the phenomenon of disposition effect in investments.

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Investment transparency and the disposition effect

Cited by 10 publications

References 87 publications

UNLOCKING THE INVESTMENT PUZZLE: THE INFLUENCE OF BEHAVIORAL BIASES & MODERATING ROLE OF FINANCIAL LITERACY

UNLOCKING THE INVESTMENT PUZZLE: THE INFLUENCE OF BEHAVIORAL BIASES & MODERATING ROLE OF FINANCIAL LITERACY

Framing effect and disposition effect: investment decisions tools to understand bounded rationality

Shed old baggage and invest wisely. A bibliometric and thematic analysis of disposition effect and investment

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