Belief in Mean Reversion and the Disposition Effect: An Experimental Test

Peiran Jiao*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

9 Citations (Web of Science)

Abstract

Abstract the disposition effect refers to investors' tendency to disproportionately sell more winning than losing assets. The literature mostly offered indirect evidence regarding its cause. Using a lab experiment, the author directly evaluates the two competing behavioral mechanisms for this effect: belief in mean reversion and dual risk attitudes of prospect theory. The participants were endowed with some hypothetical assets, observed price charts, and made selling decisions. Sixty-one percent of them exhibited significant disposition effect. The author elicited the participants' risk attitude parameters and beliefs about price movements, and found that beliefs, especially those in the loss domain, but not the dual risk attitudes, significantly contributed to the between-subject variation of the disposition effect. The results from a goodness-of-fit test also favor the belief mechanism.
Original languageEnglish
Pages (from-to)29-44
JournalJournal of Behavioral Finance
Volume18
Issue number1
DOIs
Publication statusPublished - 2017

Keywords

  • Disposition effect
  • Belief in mean reversion
  • Prospect theory
  • Experiment

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