An experimental economic study of loss aversion in stock trading decisions

Abstract

The disposition effect is a form of behavioral bias that tends to result in investors holding on to their losing stocks for too long and selling winning stocks too soon. It can be explained by the Behavioral Economics theory of Loss Aversion. Even though this kind of behavioral bias has been studied in a variety of countries, none of them have investigated the disposition effect in the case of Thailand. Therefore, the main objective of this study is to test the disposition effect among Thais by applying the experimental economic approaches of Weber and Camerer (1998) and Odean (1998), while also including the findings of questionnaires and interviews. A simulation stock trading market was set up to test the disposition effect of participants regardless of whether or not they had stock trading experienced. The subjects were required to trade among six stocks in 14 trading periods. There were also three more periods added to test how different types of news impacted the trading decisions of the subjects. In addition, the socio-economic factors that affect the disposition effect behavior were analyzed using an Econometric Binary Choices model. Regarding the results, it was found that this experiment can exhibit the disposition effect of subjects in terms of overall and individual measurement. In normal stock trading situations, it was found that over 70% of subjects showed clear signs of the disposition effect, while the disposition effect behavior seemed to decrease after they received the fictional news.

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