In Search of the Underlying Mechanism of the Disposition Effect
Article first published online: 24 JAN 2011
Copyright © 2011 John Wiley & Sons, Ltd.
Journal of Behavioral Decision Making
Volume 25, Issue 2, pages 196–209, April 2012
How to Cite
Lehenkari, M. (2012), In Search of the Underlying Mechanism of the Disposition Effect. J. Behav. Decis. Making, 25: 196–209. doi: 10.1002/bdm.727
- Issue published online: 19 MAR 2012
- Article first published online: 24 JAN 2011
- disposition effect;
- escalation of commitment;
- investor behavior;
- prospect theory
Using comprehensive data from the Finnish stock market, we assess the explanatory value of the three most commonly cited explanations for the disposition effect: prospect theory, belief in mean reversion, and escalation of commitment. In general, the results provide evidence for the presence of the disposition effect. More importantly, the effect appears to be significantly more pronounced when investors are personally responsible for the initial investment decision. This finding suggests that investor behavior is influenced above all by self-justificatory concerns, an interpretation that is consistent with the escalation of commitment-based explanation of the disposition effect. Copyright © 2011 John Wiley & Sons, Ltd.