The Causal Effect of Stop-Loss and Take-Gain Orders on the Disposition Effect

Abstract

We investigate whether automatic selling devices causally reduce investors' disposition effect (DE) in a laboratory experiment. Investors can actively buy and sell assets. Investors in the treatment group use stop-loss and take-gain options to automatically sell assets. In addition, we introduce a reminder condition that reminds investors about their selling plan if a limit is hit. Results show that the automatic selling device treatment significantly reduces the DEs, but the reminder treatment does not. Thus, the opportunity to ex ante commit to automatically selling at a loss causally reduces the disposition effect. (JEL C91, G02, G11) data can be found on The Review of Financial Studies web site.

Doing Less With More

“…7 Linnainmaa [2010] and Fischbacher et al [2017] provide further motivation for distinguishing between traders' market and limit orders when measuring the disposition effect. constraint causes an economically significant reduction in traders' disposition effect.…”

“…We designed a portfolio choice experiment to test the effect of leverage on decision-making in a risky environment. Our design was based on the experiment of Fischbacher et al [2017] who examines the effect of stop-loss and take-gain orders on the disposition effect. Investors made a series of investment decisions over the course of multiple periods, choosing which assets to hold, sell, or buy given their budget constraint.…”

“…We followed Fischbacher et al [2017] in measuring the disposition effect in our experiment. Their measurement is analogous to Odean [1998] where the propensity to realize gains and losses is calculated in relation to the opportunity set.…”

Learning From Peers’ Eye Movements in the Absence of Expert Guidance: A Proof of Concept Using Laboratory Stock Trading, Eye Tracking, and Machine Learning

“…Specifically, we conducted two laboratory stock market experiments, based on a well‐established behavioral finance framework (used by Fischbacher, Hoffmann, & Schudy, ; Frydman, Barberis, Camerer, Bossaerts, & Rangel, ; Frydman & Camerer, ; Kuhnen, ; among others). Subjects trade stocks, each of which can be either “good” (more likely to increase in price than to decrease) or “bad.” Although they are not aware of whether a given stock is good, they can infer this from its observed price path.…”

Realization utility with adaptive reference points

“…Moreover, Ingersoll and Jin () find that heterogeneity in investors' trading strategies is necessary to calibrate their model to the empirical data on the disposition effect. Furthermore, a variety of sources for the disposition effect other than realization utility might be postulated or identified, such as speculative trading (Ben‐David & Hirshleifer, ), salience of stock characteristics (Hartzmark, ), and dynamic inconsistency (Fischbacher, Hoffmann, & Schudy, ). We contribute to the literature by showing the effect on trading strategies and on the tendency to sell winners and hold losers of several new components in a model of realization utility, specifically, the degree of reference point adaptation and the degree to which investors derive utility from terminal wealth.…”