Chapter 4: The Disposition Effect and Individual Investor Decisions: The Roles of Regret and Counterfactual Alternatives
Suzanne O’Curry Fogel and Thomas Berry Investors are frequently cautioned to resist attachments to particular stocks in order to avoid holding losers too long (e.g. Sease and Prestbo, 1993). Although this advice seems obvious, a number of recent studies have documented a strong tendency for individual investors to delay realizing capital losses, while realizing gains prematurely (Odean, 1998; Shefrin and Statman, 1985; Weber and Camerer, 1998). This tendency has been termed the ‘disposition effect.’ The disposition effect is inconsistent with normative approaches to stock sales, such as those based on tax losses (see, e.g., Constantinides, 1983). We found when we surveyed individual investors that many more respondents reported feeling regret about holding on to a losing stock too long than for selling a winning stock too soon. This finding suggests that individual investors understand, at least in hindsight, the repercussions of an investment style that they are warned against. This chapter reports some of the results of our survey of individual investors as well as the findings of two experiments that probe some of the factors underlying investor satisfaction and regret, in the context of the disposition effect. We focus on the disposition effect because it is a pervasive phenomenon that is contrary to normative approaches to individual investing and reliably leads to consequences that evoke regret. First, we briefly review the literature on the disposition effect and relevant findings from the study of regret. We follow with our studies, and conclude with suggestions for future research. THE DISPOSITION EFFECT...
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