Discuss the two reasons that the disposition effect hurts investment performance

Expert Solution

The disposition effect is an anomaly discovered in behavioral finance. It relates to the tendency of investors to sell shares of the company whose price has increased while keeping shares of the company whose price has dropped.

The disposition effect is coherent with predictions from prospect theory about how people perceive losses. Prospect theory states that individuals are a loss- (and risk-) averse when facing positive outcomes (gains), and risk-seeking when facing negative outcomes (losses). As a result, investors prefer to hold the loser, just as they prefer to accept a gamble instead of a sure loss, even if the gamble is characterized by the probability of losing more money than the sure loss

The disposition effect is also coherent with theories about decision regret. Winners are sold quickly because investors prefer to avoid regret due to a market trend change that can reduce their gains. More often, though, investors tend to sell winning stocks while their value is still rising.

jeff jeffy answered 4 months ago

Discuss the effect of monetary policy on investment spending.

There are many reasons why an employee’s performance might not meet expected standards.’ Discuss.

Discuss the assumptions, predictions, and performance of the “catch-up” model. What are some reasons that countries...

Discuss the assumptions, predictions, and performance of the “catch-up” model. What are some reasons that countries might have failed to “catch-up” over time? What, if anything, should those countries do differently in the future? Research an article that illustrates a country pursuing a policy which has hampered their economic growth in the past. Share a link to the article and include a brief description of the situation it describes, along with how you think they could improve things moving forward.

1. Discuss how return on investment and residual income are used to evaluate investment center performance...

1. Discuss how return on investment and residual income are used to evaluate investment center performance 2. Compare and contrast capital budgets from operating budgets

Discuss China’s efforts to encourage investment in its underdeveloped areas. What effect will investment have on...

Discuss China’s efforts to encourage investment in its underdeveloped areas. What effect will investment have on these areas? How can firms prepare for the unique challenges of operating in these areas?

Discuss the pros and cons of active and passive investment management. when and for what reasons...

Discuss the pros and cons of active and passive investment management. when and for what reasons might you recommend either of these investment strategies?

discuss the reasons why net present value is used to make investment decisions.

Describe the various reasons that anthropologists study performance by providing at least two specific examples.

Discuss two reasons for which a court may determine legislation to be unconstitutional.

) Two investment advisers are comparing performance. One averaged a 20% rate of return and the...

) Two investment advisers are comparing performance. One averaged a 20% rate of return and the other an 18% rate of return. However, the beta of the first investor was 1.6, whereas that of the second was 1. i) Can you tell which investor was a better selector of individual stocks (aside from the issue of general movements in the market)? ii) If the Treasury bill (T-bill) rate was 7% and the market return during the period was 12%, which...

Question