Why do investors sell losers? How adaptation to losses affects future capitulation decisions

  • According to disposition effect theory, people hold losing investments too long. However, many investors eventually sell at a loss, and little is known about which psychological factors contribute to these capitulation decisions. This study integrates prospect theory, utility maximization theory, and theory on reference point adaptation to argue that the combination of a negative expectation about an investment’s future performance and a low level of adaptation to previous losses leads to a greater capitulation probability. The test of this hypothesis in a dynamic experimental setting reveals that a larger total loss and longer time spent in a losing position lead to downward adaptations of the reference point. Negative expectations about future investment performance lead to a greater capitulation probability. Consistent with the theoretical framework, empirical evidence supports the relevance of the interaction between adaptation and expectation as a determinant of capitulation decisions. Keywords: Investments , Adaptation , Reference Point , Capitulation , Selling Decisions , Disposition Effect , Financial Markets JEL Classification: D91, D03, D81

Download full text files

Export metadata

Additional Services

Share in Twitter Search Google Scholar
Author:Carmen Lee, Roman KräusslORCiDGND, André Lucas, Leo Paas
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2010,23
Series (Serial Number):CFS working paper series (2010, 23)
Document Type:Working Paper
Year of Completion:2010
Year of first Publication:2010
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2010/12/14
Tag:Adaptation; Capitulation; Disposition Effect; Financial Markets; Investments; Reference Point; Selling Decisions
GND Keyword:Kapitalanlage; Verlust; Anlageverhalten
Issue:November 30, 2010
Page Number:44
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht