The Disposition Effect in Securities Trading: an Experimental Analysis, Review

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The Disposition Effect in Securities Trading: An Experimental Analysis Martin Weber and Colin F. Camerer

In the article in question, the behavioral patterns of security investors under certain circumstances have been observed. The term “disposition effect” is used to explain the trend, which has been shaped by the fact that the investors are more likely to sell their profit gaining assets compared to other securities they are holding. Through the empirical studies, we are aware that the disposition effect is in existence. However, it isn’t very easy to test it due to the difficulties of obtaining data about investors’ expectations. This is why this research is considered as an experimental investigation of the subject. The prospect theory says that the investors evaluate their gains and losses according to the price they paid for their investment. The price can be the “reference point”. They are willing to be risk takers when there is a risk of a loss (shown as P-L), and they are most likely to be risk-averse if there is a profit (P+G). When the difference between these two approaches is used quantitatively, it shows the “reflection effect”. The disposition effect only occurs when the reference point is the initial amount of money which has been paid for the investment, or it is from a previous point in time. Because when the current price is being used as the reference point, then the stocks with gain and stocks with loss won’t differ. Therefore (in order to observe the disposition effect) the reference point cannot be the current price of the asset. What was mainly tested is if shares sold for losing assets exceed the number of winning assets sold. However, the test should be based on reference points if our intention is questioning the disposition effect. It led to creation of 4 different hypotheses:

Hl: (Purchase price reference point) Subjects sell more shares when the sale price is above the purchase price than when the sale price is below the...
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