Slow Belief Updating and the Disposition Effect
Open accessAbstract
I present a theory of investor selling behavior in which the disposition effect arises because investors are slow to update their beliefs about the values of the assets they hold. I show numerically that the theory generates a disposition effect, propensity to sell functions, and other trading statistics that are in line with empirical estimates. I also show that the theory generates a reversed disposition effect at the end of the tax year, a weaker effect for more sophisticated investors, a stronger effect in more volatile stocks, and a disposition effect in short sales.
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The finding that option features influence the disposition effect presents a challenge for disposition effect theories based on prospect theory, speculative belief updating, and the law of small numbers, as well as for rational theories of the disposition effect.
“our finding that option features influence the disposition effect presents a challenge for disposition effect theories based on prospect theory (Shefrin and Statman, 1985), speculative belief updating (Pitkäjärvi, 2022), and the law of small numbers (Jin and Peng, 2023), as well as for rational theories of the disposition effect (Dorn and Strobl, 2023; Dai, Jiang, Liu, and Xu, 2023).”
From Striking Out: Biases and Losses of Retail Option Traders (2024) · cites this paper as Pitkäjärvi, 2022
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Striking Out: Biases and Losses of Retail Option Traders
Pitkäjärvi, A., & Vacca, M. (2024) · SSRN Working Paper · doi:10.2139/ssrn.4848713 · Cited by 1 · see citing works
Self-citation
- Authors
- Pitkäjärvi, A.
- Affiliations
- Aalto University (FI)
- Corresponding author
- Pitkäjärvi, Aleksi
- ORCID
- Pitkäjärvi, Aleksi
- Venue
- SSRN Electronic Journal
- Publisher
- Elsevier BV
- Published
- 2022
- ISSN
- 1556-5068 (ISSN-L)
- OpenAlex
- W4312251208
- Cited by
- 0
- References
- 0
- Type
- posted content
- Language
- en
- Open access
- green
- doi.org
- Locations
- SSRN Electronic Journal (acceptedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
- Keywords
- disposition effect, belief updating, investor sophistication, stock market volatility, short selling, behavioral finance, asset valuation
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