Publications – Dreihaus College of Business
Title
The Disposition Effect and Individual Investor Decisions: The Role of Regret and Counterfactual Alternatives
Document Type
Article
Publication Date
January 2006
Abstract
Recent studies have documented a strong tendency for individual investors to delay realizing capital losses, while realizing gains prematurely (Odean [1996], Shefrin and Statman [1985], Weber and Camerer [1996]). 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, for example, Constantinides [1983]). We surveyed individual investors, and found that more respondents reported regret about holding on to a losing stock too long than about selling a winning stock too soon. This finding suggests that individual investors are consistently engaging in behavior that they have been warned can cost them money and that they regret later. Two additional experiments confirm the disposition effect and the role of regret, and offer evidence about the role of an agent (broker) in the assignment of blame and regret. We show that investor satisfaction and regret are not simply functions of outcome, but are influenced by counterfactual alternatives and the type of action taken (holding versus selling). We suggest that the disposition effect may be highly related to reduction of anticipated regret.
Source Publication
Journal of Behavioral Finance
Recommended Citation
Berry, Thomas and Fogel, Suzanne. (2006) The Disposition Effect and Individual Investor Decisions: The Role of Regret and Counterfactual Alternatives. Journal of Behavioral Finance. 107-116.
https://via.library.depaul.edu/buspubs/37