Disposition Effect in the Context of Experimental Trading on Highly Liquid Financial Markets

Abstract

The doctoral thesis focuses on behavioral finance, specifically on the disposition effect in trading and its presence in an experimental data set. The disposition effect was firstly described in the stock investing context as a behavioral tendency of investors to hold on losing stocks for too long and sell winning stocks too early. Simply put, an investor in the case of a loss trade hopes that the situation reverses in the near future. Contrary in case of profitable trades, the investor is afraid of a potential loss that might come if he holds the trade longer. It was mentioned for the first time in work called Prospect Theory: An Analysis of Decision under Risk, published by Kahneman et al. (1979). The disposition effect is a significant phenomenon, which might lead in the worst case to a global financial market disorder. The thesis aims to examine whether the disposition effect can be identified in selected experimental trading data and, if so, what are the affecting factors and the differences within various groups of traders. The use of experimental data and the procedure if their completion are significant differences of this thesis as compared to previous works, which, to author’s best knowledge, were based mostly on data collected from real investors, for which specific characteristics and standardized behavioral biases such as self-selection bias (see Adams et al. (2012)) can be assumed. Moreover, the effect of the trader’s current wealth or social status is eliminated. Additional advantages and disadvantages of the experimental setting of the research are presented in Chapter 3.5 of this doctoral thesis. Overall, the disposition effect has been confirmed within this data set and discussed from several points of view. The key findings to be that traders, no matter if they face real losses or not, succumb to the disposition effect. Moreover, the disposition effect is closely related and affected by the risk attitude, gender, and culture. The doctoral thesis has the standard structure. The Introduction is followed by Chapter 2, proposing a theoretical background of the research and review of relevant literature. Chapter 3 focuses on mathematical and statistical methods used to achieve the aim, namely statistical methods, GUHA method, and logistic regression. Moreover, the TimeLtoP ratio and the process of experimental data collection are described. A crucial part of the thesis, Chapter 4, presents the results of the research. The thesis is, as usual, finished by a Conclusion.