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What Drives the Disposition Effect? An Analysis of a Long‐Standing Preference‐Based Explanation
Author(s) -
BARBERIS NICHOLAS,
XIONG WEI
Publication year - 2009
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01448.x
Subject(s) - disposition , disposition effect , prospect theory , preference , economics , econometrics , loss aversion , microeconomics , psychology , social psychology , paleontology , context (archaeology) , biology
We investigate whether prospect theory preferences can predict a disposition effect. We consider two implementations of prospect theory: in one case, preferences are defined over annual gains and losses; in the other, they are defined over realized gains and losses. Surprisingly, the annual gain/loss model often fails to predict a disposition effect. The realized gain/loss model, however, predicts a disposition effect more reliably. Utility from realized gains and losses may therefore be a useful way of thinking about certain aspects of individual investor trading.