The influence of investor psychology on disposition effect

Abstract

In 1980s, many empirical researches' findings (i.e., Shiller(1984), Thaler (1985) et al.) did not support efficient market hypothesis (EMH). Previous studies (e.g., Bernartzi and Thaler, 1995) related to behavioral model suggest that certain market anomalies are consistent with the presence of irrational trades by investors. Kahneman and Tversky (1979) proposed the prospect theory as an alternative to expected utility in describing investor behavior. Based on previous works (Lichtenstein, Fischhoff and Phillips, 1982; Shefrin and Statman, 1985) this research examined the influences of overconfidence, mental accounting, regret aversion and self-control on the disposition effect of selling winners too early and holding losers too long. The results of empirical data analysis of 290 investors indicate that all four psychological factors have significant influences on the disposition effect. The findings show that (1) overconfidence, mental accounting and self- control positively influence the disposition effect, and (2) self-control negatively influences the disposition effect. As predicted, self control can reduce irrational behavior of investor.