prospect theory and the disposition effect

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1、JOURNALOFFINANCIALANDQUANTITATIVEANALYSISVol.45,No.3,June2010,pp.791–812COPYRIGHT2010,MICHAELG.FOSTERSCHOOLOFBUSINESS,UNIVERSITYOFWASHINGTON,SEATTLE,WA98195doi:10.1017/S0022109010000244ProspectTheoryandtheDispositionEffectMarkkuKaustia∗AbstractThispapershowsthatprospe

2、cttheoryisunlikelytoexplainthedispositioneffect.Prospecttheorypredictsthatthepropensitytosellastockdeclinesasitspricemovesawayfromthepurchasepriceineitherdirection.Tradingdata,ontheotherhand,showthatthepropensitytoselljumpsatzeroreturn,butitisapproximatelyconstantover

3、awiderangeoflossesandincreasingorconstantoverawiderangeofgains.Further,thepatternofrealizedreturnsdoesnotseemtostemfromoptimalafter-taxportfoliorebalancing,abeliefinmean-revertingreturns,orinvestorsactingontargetprices.I.IntroductionEmpiricalstudiesconvincinglyshowtha

4、tinvestorsarereluctanttorealizelosses(i.e.,thereisadispositioneffect).1However,itisnotclearwhythiseffectexists.Knowledgeregardingthecausesofthedispositioneffecthasimplicationsfortheoreticalmodelingoftradingbehavior.Inaddition,ithasimportantpracticalimplications,aspres

5、criptiveadvicecruciallydependsontheextenttowhichtheeffectiscausedbypreferences,beliefs,orpsychologicalbiases.∗Kaustia,kaustia@hse.fi,AaltoUniversity,SchoolofEconomics,POBox21210,FI-00076AALTO,Helsinki,Finland.IthankMattiKeloharjuforinvaluablehelpwiththedataaswellascom-

6、ments.ThecommentsbyBradBarber(thereferee)helpedsubstantiallyimprovethepaper.IalsothankTomBerglund,HendrikBessembinder(theeditor),RandolphCohen,BingHan,SeppoIkaheimo,Esa¨Jokivuolle,AndersLoflund,JacobSagi,HershShefrin,TuomoVuolteenaho,aswellasseminarpar-¨ticipantsattheE

7、uropeanWinterFinanceSummit(EWFS)2005,BankofFinland,JointResearchSeminaroftheHelsinkiSchoolofEconomicsandtheSwedishSchoolofEconomics,andFinnishPostgraduateProgrammeinEconomicsWorkshopfortheircomments.FinancialsupportfromtheJennyandAnttiWihuriFoundation,FoundationforEco

8、nomicEducation,andFinnishFoundationforSharePromotionisgratefullyacknowledged.1Evidenceofthedispositioneffecthasbeenfoundamon