What Drives the Disposition Effect? An Analysis of a Long‐Standing Preference‐Based Explanation
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- 13 March 2009
- journal article
- Published by Wiley in The Journal of Finance
- Vol. 64 (2) , 751-784
- https://doi.org/10.1111/j.1540-6261.2009.01448.x
Abstract
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.Keywords
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