Atlantis Press Paper Details: The Influence of Investor Psychology on Disposition Effect

In 1980s, many empirical researches’ findings (i.e., Shiller(1984), Thaler (1985) et al. ) did not support efficient market hypothesis (EMH). Previous studies (e.g., Bernartzi and Thaler, 1995) related to behavioral model suggest that certain market anomalies are consistent with the presence of irrational trades by investors. Kahneman and Tversky (1979) proposed the prospect theory as an alternative to expected utility in describing investor behavior. Based on previous works (Lichtenstein, Fischhoff and Phillips, 1982; Shefrin and Statman, 1985) this research examined the influences of overconfidence, mental accounting, regret aversion and self-control on the disposition effect of selling winners too early and holding losers too long. The results of empirical data analysis of 290 investors indicate that all four psychological factors have significant influences on the disposition effect. The findings show that (1) overconfidence, mental accounting and self- control positively influence the disposition effect, and (2) self-control negatively influences the disposition effect. As predicted, self control can reduce irrational behavior of investor.


title:		The Influence of Investor Psychology on Disposition Effect
publication:		JCIS-2006 Proceedings
part of series:		Advances in Intelligent Systems Research
ISBN:		978-90-78677-01-7
ISSN:		1951-6851
DOI:		doi:10.2991/jcis.2006.96 (how to use a DOI)
author(s):		Shu Chun Hsiao, Sun Pi-Chuan
corresponding author:		Shu Chun Hsiao
publication date:		October 2006
keywords:		Disposition effect, Overconfidence, Mental Accounting, Self-Control
abstract:		In 1980s, many empirical researches’ findings (i.e., Shiller(1984), Thaler (1985) et al. ) did not support efficient market hypothesis (EMH). Previous studies (e.g., Bernartzi and Thaler, 1995) related to behavioral model suggest that certain market anomalies are consistent with the presence of irrational trades by investors. Kahneman and Tversky (1979) proposed the prospect theory as an alternative to expected utility in describing investor behavior. Based on previous works (Lichtenstein, Fischhoff and Phillips, 1982; Shefrin and Statman, 1985) this research examined the influences of overconfidence, mental accounting, regret aversion and self-control on the disposition effect of selling winners too early and holding losers too long. The results of empirical data analysis of 290 investors indicate that all four psychological factors have significant influences on the disposition effect. The findings show that (1) overconfidence, mental accounting and self- control positively influence the disposition effect, and (2) self-control negatively influences the disposition effect. As predicted, self control can reduce irrational behavior of investor.
copyright:		© Atlantis Press. This article is distributed under the terms of the Creative Commons Attribution License, which permits non-commercial use, distribution and reproduction in any medium, provided the original work is properly cited.
full text:		JCIS06-CIEF-230.pdf (209 K)