Testing for the Disposition Effect on Optimal Stopping Decisions
AbstractThis paper develops a new laboratory test of the hypothesis that individual investors sell winners too early and ride losers too long. In the experiment, subjects invest in a risky asset, whose price evolves in near-continuous time, and they are provided with the option to liquidate it at a fixed salvage value. Optimal behavior is characterized by an upper and a lower stopping thresholds in the asset price space, thus producing a clear rational benchmark and eliminating known confounds. This design allows me to detect and quantify the disposition effect in a sample of 108 subjects.
CitationMagnani, Jacopo. 2015. "Testing for the Disposition Effect on Optimal Stopping Decisions." American Economic Review, 105 (5): 371-75. DOI: 10.1257/aer.p20151039
- D14 Household Saving; Personal Finance
- D81 Criteria for Decision-Making under Risk and Uncertainty
- G11 Portfolio Choice; Investment Decisions