Debiasing the disposition effect by reducing the saliency of information about a stock's purchase price.

The disposition effect refers to the empirical fact that investors have a higher propensity to sell risky assets with capital gains compared to risky assets with capital losses, and it has been associated with low trading performance. We use a stock trading laboratory experiment to investigate if it is possible to reduce subjects' tendency to exhibit a disposition effect by making information about a stock's purchase price, and thus about capital gains and losses, less salient. We compare two experimental conditions: a high-saliency condition in which the purchase price of a stock is prominently displayed by the trading software, and a low-saliency condition in which it is not displayed at all. We find that individuals exhibit a disposition effect in the high-saliency condition, and that the effect is 25% smaller in the low-saliency condition. This suggests that it is possible to debias the disposition effect by reducing the saliency with which information about a stock's purchase price is displayed on financial statements and online trading platforms.

[1]  M. Rabin,et al.  A Model of Reference-Dependent Preferences , 2006 .

[2]  A. Shleifer,et al.  Salience Theory of Choice Under Risk , 2010 .

[3]  Li Jin.  Inheriting Losers , 2010 .

[4]  Colin Camerer,et al.  The Attentional Drift-Diffusion Model Extends to Simple Purchasing Decisions , 2012, Front. Psychology.

[5]  Mark Grinblatt,et al.  What Makes Investors Trade? , 2000 .

[6]  Marianne Bertrand,et al.  Information Disclosure, Cognitive Biases and Payday Borrowing , 2009 .

[7]  George M. Constantinides,et al.  Capital Market Equilibrium with Personal Tax , 1983 .

[8]  Markku Kaustia.  Prospect Theory and the Disposition Effect , 2008, Journal of Financial and Quantitative Analysis.

[9]  J. Stein,et al.  A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets , 1997 .

[10]  J. Malmaud,et al.  Focusing Attention on the Health Aspects of Foods Changes Value Signals in vmPFC and Improves Dietary Choice , 2011, The Journal of Neuroscience.

[11]  Wei Xiongb,et al.  Investor attention , overconfidence and category learning , 2006 .

[12]  J. Townsend,et al.  Multialternative Decision Field Theory: A Dynamic Connectionist Model of Decision Making , 2001 .

[13]  M. W. Nelson,et al.  Experimental Research in Financial Accounting , 2001 .

[14]  David Genesove,et al.  Loss Aversion and Seller Behaviour: Evidence from the Housing Market , 2001 .

[15]  Zhi Da,et al.  In Search of Attention , 2009 .

[16]  A. Tversky,et al.  Prospect theory: an analysis of decision under risk — Source link , 2007 .

[17]  Darrell Duffie,et al.  Presidential Address: Asset Price Dynamics with Slow‐Moving Capital , 2010 .

[18]  Stefano DellaVigna,et al.  Investor Inattention and Friday Earnings Announcements , 2009 .

[19]  Andrea Bergmann,et al.  Statistical Parametric Mapping The Analysis Of Functional Brain Images , 2016 .

[20]  A. Young.  Prospect Theory: An Analysis of Decision Under Risk (Kahneman and Tversky, 1979) , 2011 .

[21]  A. Shleifer,et al.  Inefficient Markets: An Introduction to Behavioral Finance , 2002 .

[22]  J. Gottlieb.  Attention, Learning, and the Value of Information , 2012, Neuron.

[23]  Rachel A Robbins,et al.  A Review and Clarification of the Terms “holistic,” “configural,” and “relational” in the Face Perception Literature , 2012, Front. Psychology.

[24]  Ning Zhu,et al.  Up Close and Personal: Investor Sophistication and the Disposition Effect , 2006, Manag. Sci..

[25]  Can Prospect Theory Explain the Disposition Effect? A New Perspective on Reference Points , 2016 .

[26]  A. Tversky,et al.  Prospect theory: analysis of decision under risk , 1979 .

[27]  A. Rangel,et al.  Multialternative drift-diffusion model predicts the relationship between visual fixations and choice in value-based decisions , 2011, Proceedings of the National Academy of Sciences.

[28]  Terrance Odean,et al.  Are Investors Reluctant to Realize Their Losses? , 1996 .

[29]  N. Barberis,et al.  Realization Utility , 2008 .

[30]  Mark M. Westerfield,et al.  Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect , 2014 .

[31]  N. Barberis,et al.  What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation , 2006 .

[32]  V. Atanasov,et al.  Is There Shareholder Expropriation in the United States? An Analysis of Publicly Traded Subsidiaries , 2010, Journal of Financial and Quantitative Analysis.

[33]  Colin Camerer,et al.  The Disposition Effect in Securities Trading: An Experimental Analysis , 1991 .

[34]  George M. Constantinides,et al.  Handbook of the Economics of Finance , 2013 .

[35]  D. Hirshleifer,et al.  Limited Attention, Information Disclosure, and Financial Reporting , 2003 .

[36]  Andrea Frazzini,et al.  The Disposition E ff ect and Underreaction to News , 2006 .

[37]  T. Hens,et al.  Does Prospect Theory Explain the Disposition Effect? , 2005 .

[38]  Karl J. Friston,et al.  Mixed-effects and fMRI studies , 2005, NeuroImage.

[39]  J. Townsend,et al.  Decision field theory: a dynamic-cognitive approach to decision making in an uncertain environment. , 1993, Psychological review.

[40]  A. Shleifer,et al.  Salience and Consumer Choice , 2012, Journal of Political Economy.

[41]  R. Thaler,et al.  A Survey of Behavioral Finance , 2002 .

[42]  Andrea Frazzini,et al.  Economic Links and Predictable Returns , 2007 .

[43]  Bing Han,et al.  Speculative Retail Trading and Asset Prices , 2011, Journal of Financial and Quantitative Analysis.

[44]  Ian Krajbich,et al.  Visual fixations and the computation and comparison of value in simple choice , 2010, Nature Neuroscience.

[45]  G. Constantinides.  The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence: Discussion , 1985 .

[46]  J. Ingersoll,et al.  Realization Utility with Reference-Dependent Preferences , 2012, 1408.2859.

[47]  Itzhak Ben-David,et al.  Are Investors Really Reluctant to Realize their Losses? Trading Responses to Past Returns and the Disposition Effect , 2012 .

[48]  R. Thaler,et al.  Chapter 18 A survey of behavioral finance , 2003 .

[49]  Mark S. Seasholes,et al.  Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets , 2005 .

[50]  Frank Welfens,et al.  An individual level analysis of the disposition effect: empirical and experimental evidence , 2007 .