Investing PI 3

Investing PI 3 - study, under a month, gains are 45...

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There is more pain in the regret of commission than the regret of omission. The regret of commission is the regret of acting taking a different action than before and the regret of omission is the regret of not acting. Financial economists, Hersh Shefrin and Meir Statman and discovered the disposition effect, the tendancy to sell winners too early and ride losers too long from a result of fearing regret and seeking pride. The idea of weath-maximizing does not play a role as the disposition effect does. Although on a tax basis, selling a losing stock would lead to overall more capital, people will still sell their winners and take less money due to pride. In addition to the disposition effect, their will be higher volume for stocks that are bullish and lower volume for stock that is bearish as a result of people selling their gains and holding their losses. Individuals are willing to sell their gains quick compared to losers which will be held until rebounded. In a
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Unformatted text preview: study, under a month, gains are 45 percent, 1 to 6 months were 7.8, 6 to 12 were 5.1 and more than one year was 4.5 percent. Investors acheive more pride from a larger gain but the reluctance to sell a loser is the same regardless if big or small. The disposition effect is pervasive and happens internationally as well and occurs in other investments besides stocks such as real estate or employee stock. However, the disposition effect and loss aversion do not occur in mutual funds; this is believe to be a result of blaming others and therefore having less regret. Along the lines of the disposition effect is that good news of a firm will cause selling while bad news will cause people to hold. A reference point is the comparison of a stock price that to its current price. An underreaction is the rebound of a stock after great news which was suppressed by selling to lock in profits....
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This note was uploaded on 09/13/2011 for the course FIN 250 taught by Professor Johansen during the Fall '10 term at Boise State.

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