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Wide framing disposition effect : an empirical study

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Brettschneider, Julia, Burro, Giovanni and Henderson, Vicky (2021) Wide framing disposition effect : an empirical study. Journal of Economic Behavior and Organization, 185 . pp. 330-347. doi:10.1016/j.jebo.2021.03.003

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Official URL: https://doi.org/10.1016/j.jebo.2021.03.003

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Abstract

We estimate the disposition effect for active traders in a large discount brokerage dataset containing US households trading records between 1991 and 1996. We apply a wide framing perspective, focusing on portfolios rather than individual stocks. We find that the disposition effect varies inversely with the proportion of stocks trading at a gain in the portfolio, nearly vanishing when this proportion reaches 50%. This is driven by how the realisation of gains and losses depends on the percentage of gains in the account. The probability to realise a loss increases with the percentage of gains in the account. The relation between the probability of realising a gain and the percentage of gains in the bank account follows a U-shape. We also estimate the change in the disposition effect when an investor realises more than one stock on a trading day. We find when investors sell a stock, they are much more likely to also realise another stock on the same day. In particular, selling a loss increases an investor’s propensity to sell a gain and vice versa. This key finding provides an explanation for the observed dependency of the disposition effect on the portfolio composition. We also propose several psychological explanations for our findings.

Item Type: Journal Article
Subjects: B Philosophy. Psychology. Religion > BF Psychology
H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Divisions: Faculty of Science > Statistics
Library of Congress Subject Headings (LCSH): Stock exchanges , Stock-flow analysis , Stock exchanges -- Psychological aspects, Stockholders -- Decision making -- Mathematical models, Risk-taking (Psychology) -- Economic aspects
Journal or Publication Title: Journal of Economic Behavior and Organization
Publisher: Elsevier
ISSN: 0167-2681
Official Date: May 2021
Dates:
DateEvent
May 2021Published
19 March 2021Available
1 March 2021Accepted
Volume: 185
Page Range: pp. 330-347
DOI: 10.1016/j.jebo.2021.03.003
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
Bridges doctoral scholarshipLeverhulme Trusthttp://dx.doi.org/10.13039/501100000275
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