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Do the disposition and house money effects coexist? A reconciliation of two behavioral biases using individual investor-level data.

Lookup NU author(s): Professor Darren DuxburyORCiD, Professor Robert Hudson

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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License (CC BY-NC 4.0).

Abstract

This paper uses investor-level data to examine jointly the tendency of investors to succumb to the disposition effect and the house money effect; two behavioral biases premised on seemingly contradictory responses to prior gains/losses. We document three novel findings. First, the two effects can contemporaneously coexist in a single stock market and the majority of investors (53.5%) simultaneously succumb to both effects. Second, we demonstrate the importance of distinguishing prior outcomes across two dimensions; unrealized/realized and stock/portfolio level. Third, we find that the house money effect moderates the disposition effect, suggesting that cognitive biases need not always have negative consequences.

Publication metadata

Author(s): Duxbury D, Hudson R, Keasey K, Yang Z, Yao S

Publication type: Article

Publication status: Published

Journal: Journal of International Financial Markets, Institutions and Money

Year: 2015

Volume: 34

Pages: 55-68

Print publication date: 01/01/2015

Online publication date: 06/11/2014

Acceptance date: 03/11/2014

Date deposited: 09/12/2014

ISSN (print): 1042-4431

ISSN (electronic): 1873-0612

Publisher: Elsevier

URL: http://dx.doi.org/10.1016/j.intfin.2014.11.004

DOI: 10.1016/j.intfin.2014.11.004

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