Arbeitspapier

Why do investors sell losers? How adaptation to losses affects future capitulation decisions

According to disposition effect theory, people hold losing investments too long. However, many investors eventually sell at a loss, and little is known about which psychological factors contribute to these capitulation decisions. This study integrates prospect theory, utility maximization theory, and theory on reference point adaptation to argue that the combination of a negative expectation about an investment's future performance and a low level of adaptation to previous losses leads to a greater capitulation probability. The test of this hypothesis in a dynamic experimental setting reveals that a larger total loss and longer time spent in a losing position lead to downward adaptations of the reference point. Negative expectations about future investment performance lead to a greater capitulation probability. Consistent with the theoretical framework, empirical evidence supports the relevance of the interaction between adaptation and expectation as a determinant of capitulation decisions.

Language
Englisch

Bibliographic citation
Series: CFS Working Paper ; No. 2010/23

Classification
Wirtschaft
Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡
Criteria for Decision-Making under Risk and Uncertainty
Subject
Investments
Adaptation
Reference Point
Capitulation
Selling Decisions
Disposition Effect
Financial Markets

Event
Geistige Schöpfung
(who)
Lee, Carmen
Kräussl, Roman
Lucas, André
Paas, Leo
Event
Veröffentlichung
(who)
Goethe University Frankfurt, Center for Financial Studies (CFS)
(where)
Frankfurt a. M.
(when)
2010

Handle
URN
urn:nbn:de:hebis:30-87115
Last update
10.03.2025, 11:44 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Lee, Carmen
  • Kräussl, Roman
  • Lucas, André
  • Paas, Leo
  • Goethe University Frankfurt, Center for Financial Studies (CFS)

Time of origin

  • 2010

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