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Management Review Quarterly
Published in: Management Review Quarterly 1/2017

01-02-2017 | State-of-the-Art

The disposition effect: a survey

Author: Marco Pleßner

Published in: Management Review Quarterly | Issue 1/2017

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Abstract

The disposition effect is a well-recognized behavioral economic phenomenon which has been studied in numerous papers during the last three decades. Besides a literature review of the major theoretical, empirical, and experimental papers, the body of academic literature is subjected to a bibliometric analysis where all papers are taken into account which can be found via the search engine “EBSCOhost” (589 hits). This paper not only extensively describes the state of the art of research on the topic of the disposition effect. The combination of insights from a content analysis as well as a bibliometric analysis serves as a case study on the pattern of diffusion of research hypotheses and research methods. For example, it can be shown that the number of publications per year on the disposition effect remained relatively low subsequent to its discovery and only later started to substantially grow over time. On the other hand, the quality of papers, as approximated by the share of “A” journal articles per year, decreased over time.
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Footnotes
1
Experiments are generally regarded as a method in empirical economics (see, e.g., Starmer 1999). Although experimental analyses generate empirical results, I discriminate experimental from empirical studies (see, e.g., Weber and Welfens 2006 who explicitly describe an empirical and an experimental study in the same paper). Throughout this paper, studies are described as “experimental” when the authors chose an experimental approach in which they explicitly test an experimental design in classroom or laboratory conditions. I refer to studies as “empirical” whenever field data or market data are analyzed.
 
2
Ben-David and Hirshleifer (2012, p. 2491) even state that ”[p]erhaps the most prominent trading anomaly in financial economics is the disposition effect.“
 
3
A broad variety of studies indicate a vast gap between selling prices (willingness to accept [WTA]) and buying prices (willingness to pay [WTP]) (see Kagel and Roth 1995) which is due to the fact that people prefer things they own (ceteris paribus). Norton et al. (2012) find that this pattern is enhanced when participants perform physical work on the valued object which they label the “IKEA effect”. Bühren and Pleßner (2014) found a phenomenon closely linked to these effects. Their “trophy effect” implies that the value people assign to certain objects substantially increases when they win the respective item in an effortful competition.
 
4
In this context, Strahilevitz et al. (2011) show that investors in the sample of their empirical study are not willing to repurchase stocks which they had sold at a loss and stocks the price of which has risen directly after selling.
 
5
Besides these prominent measures, other measures of the disposition effect exist. e.g., Goetzmann and Kumar (2008) use the so called adjusted disposition effect (ADE) measure. However, the PGR–PLR-methodology is more common and thus more suitable for the overview in Table 1.
 
6
Ben-David and Hirshleifer (2012) offer an interesting finding in this context. They suggest that “at short holding periods, investors are more likely to sell big losers than small ones“ (Ben-David and Hirshleifer 2012, p. 2485).
 
7
The measure of the cost basis Grinblatt and Han (2005) used concentrates on trading volume while Frazzini (2006) develops a measure which is based on portfolio holdings. He claims that “[t]he advantage of using holdings relies on the possibility of unambiguously identifying the fraction of shares purchased at a previous date that is still held by the original purchasers at the current date, thus taking into account shareholder heterogeneity in the anchor points“ (Frazzini 2006, p. 2023).
 
8
Search “disposition effect“ in category “TX All Text” delivers the respective results.
 
9
The authors analyze people’s behavior when waiting in line.
 
10
I thank an anonymous referee for hinting me to that point.
 
11
I thank an anonymous referee for hinting me to this point.
 
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Metadata
Title
The disposition effect: a survey
Author
Marco Pleßner
Publication date
01-02-2017
Publisher
Springer Berlin Heidelberg
Published in
Management Review Quarterly / Issue 1/2017
Print ISSN: 2198-1620
Electronic ISSN: 2198-1639
DOI
https://doi.org/10.1007/s11301-017-0122-6