The Disposition Effect does not survive disclosure of expected price trends
(2018) Journal of Behavioral and Experimental Finance — Vol. 20, p. 80-91 (2018)
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- The disposition effect (DE) consists in investors' preference for realizing gains over losses. One DE account suggests that this bias stems from belief in mean-reverting prices. This account, however, was ruled out by Weber and Camerer (1998), who reported a DE when participants were presumably made aware of expected price trends. In two experiments, we revisited this widely cited study (i) by fully disclosing unquestionably clear and complete information about price distributions of assets, and (ii) by assessing the DE on more reliable measures. In Experiment 1, under conditions of full price distribution disclosure, a DE was replicated on Weber and Camerer (1998)'s measure but was not found on the more reliable measure. Experiment 2, which was high-powered and offered higher incentives, confirmed these findings. Hence, we conclude that belief in mean-reverting prices cannot be ruled out as a contributing factor to DE. In addition, participants were found to diversify their portfolios even when the benefits of diversification were sparsely effective. We relate the latter result to the diversification heuristic literature.
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Corneille, O., De Winne, R., & D’Hondt, C. (2018). The Disposition Effect does not survive disclosure of expected price trends. Journal of Behavioral and Experimental Finance, 20, 80-91. https://doi.org/10.1016/j.jbef.2018.08.003 (Original work published 2018)