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Is the disposition effect related to investors’ reliance on System 1 and System 2 processes or their strategy of emotion regulation?

Richards, Daniel W.; Fenton-O'Creevy, Mark; Rutterford, Janette and Kodwani, Devendra G. (2018). Is the disposition effect related to investors’ reliance on System 1 and System 2 processes or their strategy of emotion regulation? Journal of Economic Psychology

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DOI (Digital Object Identifier) Link: https://doi.org/10.1016/j.joep.2018.01.003
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Abstract

We report research on investor susceptibility to the disposition effect, a financial decision-making bias where investors have a greater propensity to realize gains than realize losses. Despite theoretical arguments for the influence of emotions, research on susceptibility to this bias, on real investors, has relied primarily on socio-demographic explanations. Some experimental research on student populations has considered emotions more directly, but has not addressed differences in individual susceptibility and has not examined genuinely consequential investor behaviour in real markets. Our research addresses this gap by predicting susceptibility to the disposition effect based on investors’ reliance on intuitive (emotion mediated) cognition (System 1), analytical cognition (System 2) and the strategies they use to regulate their emotions. Using investors’ trading records from a UK sample, we measure their susceptibility to the disposition effect and assess, through a questionnaire, their reliance on Systems 1 and 2 cognitive processes and use of two emotion regulation strategies. Investors with higher reliance on System 1 processes have greater disposition effect, but reliance on System 2 processes is not related to the disposition effect. Investor reliance on reappraisal (an emotion regulation strategy of changing a situation’s meaning to alter its emotional impact) reduces their disposition effect. However, the use of expressive suppression (a strategy that inhibits emotion expressive behaviour) does not show a statistically significant relationship with this bias. These results suggest that investors’ intuitive emotional reactions explain susceptibility to bias, and that effective strategies of regulating emotions enable this bias to be overcome.

Item Type: Journal Item
Copyright Holders: 2018 Elsevier B.V.
ISSN: 0167-4870
Keywords: Disposition effect; Dual-process theory; Emotion regulation; Financial decision-making bias; Behavioral finance
Academic Unit/School: Faculty of Business and Law (FBL)
Faculty of Business and Law (FBL) > Business > Department for People and Organisations
Faculty of Business and Law (FBL) > Business
Faculty of Business and Law (FBL) > Business > Department for Accounting and Finance
Faculty of Business and Law (FBL) > Professional Services
Item ID: 53855
Depositing User: ORO Import
Date Deposited: 15 Mar 2018 14:25
Last Modified: 02 May 2019 11:25
URI: http://oro.open.ac.uk/id/eprint/53855
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