The disposition effect, dual process theory and emotion regulation

Richards, Daniel William (2013). The disposition effect, dual process theory and emotion regulation. PhD thesis The Open University.



Research from the behavioural finance paradigm has detected bias in investors' decision making. One such bias, the disposition effect, shows that investors are reluctant to sell investments at a loss, yet are eager to sell investments at a gain. Investors vary in the extent to which they exhibit the disposition effect and research to date has found that an investor's level of sophistication and amount of experience can somewhat predict their susceptibility to this bias. Despite the disposition effect arising out of the nature of human psychology, few studies have empirically investigated psychological based explanations for susceptibility to this bias. I address this gap by applying two psychological theories to predict the susceptibility to the disposition effect: dual process theory and a model of the role of emotions and their regulation.

The thesis contains two studies on the disposition effect of UK investors, a country where investors have not previously been researched for this bias. The first study involves using survival analysis to analyse the transactions made by 4,328 UK investors from July 2006 to December 2009. The second study is a subsample ofthe first, where 261 investors completed an online questionnaire to measure the psychological variables.

I show that the average UK investor in this sample is susceptible to the disposition effect. contribute to existing knowledge about the disposition effect by showing that investor sophistication and experience attenuates, but does not eliminate, this bias. I extend knowledge on the disposition effect by showing that through the use of stop loss strategies, investors can inoculate against the disposition effect. In relation to the psychological variables, I find that investors who report higher levels of intuitive ability exhibit this bias to greater extent and investors who report a preference towards analytical cognition exhibit this bias to a lesser extent. Finally, the results tentatively show that investors who reappraise their emotions while investing, exhibit this bias to a lesser extent.

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