A dark side of hope: Understanding why investors cling onto losing stocks

Abstract

Investors are often inclined to keep losing stocks too long, despite this being irrational. This phenomenon is part of the disposition effect (“people ride losers too long, and sell winners too soon”). The current research examines the role of hope as a potential explanation of why people ride losers too long. Three correlational studies (1A, 1B, and 2) find that people's trait hope is positively associated with their inclination to keep losing stocks, regardless of their risk‐seeking tendency (Study 2). Further, three experimental studies (3, 4, and 5) reveal that people are inclined to hold on to losing (vs. not‐losing) stocks because of their hope to break even and not because of their hope to gain. Studies 4 and 5 provide process evidence confirming the role of hope and indicate potential interventions to decrease people's tendency to keep losing stocks by reducing the hope. The findings contribute to the limited empirical literature that has investigated how emotions influence the disposition effect by providing empirical evidence for the role of hope. Moreover, the findings add to the literature of hope by revealing its role in financial decision‐making and show a “dark side” of this positive emotion.

Framing effect and disposition effect: investment decisions tools to understand bounded rationality

“…The original and much empirical research about the disposition effect focuses their effort on detecting the existence of this phenomenon. The trend also moves toward exploring the determinants of the disposition effect, which can be physiology, demographics, and psychology (Betzer et al, 2021;Dayani and Jannati, 2022;Luo et al, 2022). However, to our knowledge, no such research investigates personal decisions regarding their subjective target and tolerance level in investment decisions.…”