Topic2dd - Topic IID: Applications of Prospect Theory...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Topic IID: Applications of Prospect Theory (continued) Application #4: The Disposition Effect “Disposition Effect” : When investors sell their stocks, they are more prone to sell their winners than their losers. Note: A stock is a “winner” if its current price is above its purchase price, and it is a loser if its current price is below its purchase price. Identi f Odean (1998) empirically investigates several different explanations. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Rational Explanation #1: Sell winners to rebalance your portfolio. If the disposition effect is driven by rebalancing, then if we restrict attention to trades in which (i) only entire holdings of a stock are sold or (ii) no new purchases are made, we should no longer observe a disposition effect. BUT when Odean does this, the effect does not go away. Rational Explanation #2: Sell winners because losers are better than winners. BUT Odean f nds that the winners people sell outperform the losers they keep (over various horizons). Odean’s suggested explanation is myopic loss aversion: Loss aversion combined with a mental ­ accounting assumption that you experience gain ­ loss utility for a particular stock when you sell that stock. 2
Background image of page 2
Application #5: Housing Market Genesove and Mayer (2001): They analyze data from the Boston condominium market in the 1990’s. They compare sellers subject to nominal losses with sellers subject to nominal gains. They f nd that sellers subject to nominal losses: (i) set higher asking prices. (ii) eventually attain a higher selling price
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/01/2009 for the course ECON 3240 taught by Professor Lyons during the Spring '09 term at Cornell.

Page1 / 11

Topic2dd - Topic IID: Applications of Prospect Theory...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online