Abstract
We investigate whether prospect theory preferences can predict a disposition effect. We consider two implementations of prospect theory: in one case, preferences are defined over annual gains and losses; in the other, they are defined over realized gains and losses. Surprisingly, the annual gain/loss model often fails to predict a disposition effect. The realized gain/loss model, however, predicts a disposition effect more reliably. Utility from realized gains and losses may therefore be a useful way of thinking about certain aspects of individual investor trading.
| Original language | American English |
|---|---|
| Pages (from-to) | 751-784 |
| Number of pages | 34 |
| Journal | Journal of Finance |
| Volume | 64 |
| Issue number | 2 |
| DOIs | |
| State | Published - Apr 2009 |
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
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