The Disposition Effect and Individual Investor Decisions: The Roles of Regret and Counterfactual Alternatives

Fogel, Suzanne O’Curry; Berry, Thomas

doi:10.1207/s15427579jpfm0702_5

Cited by 98 publications

(67 citation statements)

References 18 publications

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“…Another explanation for the disposition effect suggested by Shefrin and Statman (1984) and examined in this paper is regret and pride, which has recently been supported with experimental evidence (O'Curry Fogel and Berry, 2006). The idea is that if the stock has gone down one regrets the investment, and in hoping that the stock price will rise in the next period and thereby avoid regret, holds the stock.…”

Section: Introductionsupporting

confidence: 81%

Regret, Pride, and the Disposition Effect

Muermann

Volkman

2006

SSRN Journal

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We develop a dynamic portfolio choice model which incorporates anticipated regret and pride in individual's preferences and show that those preferences can cause investors to sell winning stocks and hold on to losing stocks; that is, anticipating regret and pride can help explain the disposition effect. KeywordsPortfolio choice, Anticipated regret and pride, Individual preference, Disposition effect

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Section: Introductionsupporting

confidence: 81%

Regret, Pride, and the Disposition Effect

Muermann

Volkman

2006

SSRN Journal

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“…O'Curry Fogel and Berry (2006) discussed the potential role of regret and pride in the context of losers, but without separating regret and disappointment. 8 Andreassen (1988) however suspected that investors believe after a stock reached its peak, its price is more likely to decline, whereas losing stocks are perceived to have reached bottom and are likely to rise no matter whether a lack in mean reversion is detected (Murstein (2003), Odean (1998) reported only approx.…”

Section: Prospect Theory: Fit For Finance? a Brief Reflection Of Relementioning

confidence: 99%

Taming Models of Prospect Theory in the Wild? Estimation of Vlcek and Hens (2011)

2016

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Abstract. Shortcomings revealed by experimental and theoretical researchers such as Allais (1953), Rabin (2000) and Rabin and Thaler (2001) that put the classical expected utility paradigm von Neumann and Morgenstern (1947) into question, led to the proposition of alternative and generalized utility functions, that intend to improve descriptive accuracy. The perhaps best known among those alternative preference theories, that has attracted much popularity among economists, is the so called Prospect Theory by Kahneman and Tversky (1979) and Tversky and Kahneman (1992). Its distinctive features, governed by its set of risk parameters such as risk sensitivity, loss aversion and decision weights, stimulated a series of economic and financial models that build on the previously estimated parameter values by Tversky and Kahneman (1992) to analyze and explain various empirical phenomena for which expected utility doesn't seem to offer a satisfying rationale. In this paper, after providing a brief overview of the relevant literature, we take a closer look at one of those papers, the trading model of Vlcek and Hens (2011) and analyze its implications on Prospect Theory parameters using an adopted maximum likelihood approach for a dataset of 656 individual investors from a large German discount brokerage firm. We find evidence that investors in our dataset are moderately averse to large losses and display high risk sensitivity, supporting the main assumptions of Prospect Theory.

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“…For instance, selling a losing stock may result in a feeling of an immediate, irreversible loss, whereas holding it opens a possibility of reverse direction. Fogel and Berry (2006) examine the disposition effect under regret and find that despite the fact that investors exhibit greater regret about holding a losing stock too long than about selling a winning stock too soon, during an abrupt market crisis, investors quickly DECYZJE NR 20/2013 DOI: 10.7206/DEC.1733-0092.9 sell losing stocks, which further deepens the crisis. Here, we examine the disposition effect under the fear induced by a serious market decline.…”

Section: The Losses Case and Fearmentioning

confidence: 99%

High volatility eliminates the disposition effect in a market crisis

Dacey¹,

Zielonka²

2013

Decyzje

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Abstract:The disposition effect is an effect whereby investors tend to sell winning stocks and tend to hold losing stocks. This inclination is detrimental for investment results. Dacey and Zielonka (2008) showed the impact of the probability of further stock price rise under low stock price volatility on the disposition effect. Specifically, they showed that under low volatility, in the case of a gain, the investor is more likely to sell the winner even if the probability of the further gain is high, whereas in the case of a loss, the investor is more likely to hold the loser even when the probability of a further gain is small. In this paper we examined the disposition effect under high volatility. The general conclusion is that under high volatility, in the case of a gain, the investor behaves in the same way as for low volatility, whereas in the case of a loss, the investor is less and less likely to hold the loser as volatility increases. Thus, in the case of a loss under high volatility, the investor acts contrary to the disposition effect. This result explains the panic selling of stocks during a market collapse.

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The Disposition Effect and Individual Investor Decisions: The Roles of Regret and Counterfactual Alternatives

Cited by 98 publications

References 18 publications

Regret, Pride, and the Disposition Effect

Regret, Pride, and the Disposition Effect

Taming Models of Prospect Theory in the Wild? Estimation of Vlcek and Hens (2011)

High volatility eliminates the disposition effect in a market crisis

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