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Title:Why do investors sell losers? How adaptation to losses affects future capitulation decisions PDF Logo
Authors:Lee, Carmen
Kräussl, Roman
Lucas, André
Paas, Leo
Issue Date:2010
Series/Report no.:CFS Working Paper 2010/23
Abstract: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.
Subjects:Investments
Adaptation
Reference Point
Capitulation
Selling Decisions
Disposition Effect
Financial Markets
JEL:D91
D03
D81
Persistent Identifier of the first edition:urn:nbn:de:hebis:30-87115
Document Type:Working Paper
Appears in Collections:CFS Working Paper Series, Universität Frankfurt a. M.

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