Disposition Effect on Investment Decision Making: Explanation of Regulatory-Focus Theory
The disposition effect is the tendency of investors to sell stocks early when the price increases and hold stocks longer when this price decreases. As a consequence, investors may lose opportunities to gain greater profits from a stock winner whose price continues to rise; in contrast, they can suffe...
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| Main Authors: | , , |
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| Format: | Book Section PeerReviewed |
| Language: | English English English English |
| Published: |
Springer International Publishing AG.
2017
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| Subjects: | |
| Online Access: | http://repository.unair.ac.id/60675/1/Basuki_Karya%20Ilmiah%20Tambahan%20006%20%28Cover%29.pdf http://repository.unair.ac.id/60675/2/Basuki_Karya%20Ilmiah%20Tambahan%20006%20%28Full%20Artikel%29.pdf http://repository.unair.ac.id/60675/19/Basuki_Peer%20Review%20%28Revisi%29%2007.pdf http://repository.unair.ac.id/60675/20/07-Basuki_Similarity%20Index_Disposition%20Effect%20on%20Investment%20Decision%20Making_%20Explanation%20of%20Regulatory-Focus%20Theory2.pdf http://repository.unair.ac.id/60675/ https://link.springer.com/book/10.1007/978-981-10-3566-1 https://doi.org/10.1007/978-981-10-3566-1 |
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| Institution: | Universitas Airlangga |
| Language: | English English English English |
| Summary: | The disposition effect is the tendency of investors to sell stocks early when the price increases and hold stocks longer when this price decreases. As a consequence, investors may lose opportunities to gain greater profits from a stock winner whose price continues to rise; in contrast, they can suffer greater loss when the stocks continue to decline. The disposition effect is a phenomenon widely studied in behavioral finance. There are two main competing theories attempting to explain this phenomenon: the prospect theory and the regret theory. Although both theories give a fairly comprehensive explanation, they fail to take into account the motivation of investors in making investment decisions. This paper seeks to make a critical review of both of the main theories as well as provide a new explanation related to the motivation of investors from the perspective of the regulatory-focus theory. Regulatory-focus theory explains that individuals can be categorized into two groups, i.e. the prevention group and the promotion group. Regulatory-focus theory adds a more specific explanation that the disposition effect is more likely to occur in the prevention rather than the promotion group. The explanation of the disposition effect based on regulatory-focus -is a novelty in this paper. |
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