What drives the disposition effect? An analysis of a long-standing preference-based explanation

Nicholas Barberis, Wei Xiong

Research output: Contribution to journalArticle

229 Scopus citations

Abstract

We investigate whether prospect theory preferences can predict a disposition effect. We consider two implementations of prospect theory: in one case, preferences are defined over annual gains and losses; in the other, they are defined over realized gains and losses. Surprisingly, the annual gain/loss model often fails to predict a disposition effect. The realized gain/loss model, however, predicts a disposition effect more reliably. Utility from realized gains and losses may therefore be a useful way of thinking about certain aspects of individual investor trading.

Original languageEnglish (US)
Pages (from-to)751-784
Number of pages34
JournalJournal of Finance
Volume64
Issue number2
DOIs
StatePublished - Apr 1 2009

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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