Disposition Effect on Investment Decision Making: Explanation of Regulatory-Focus Theory

• Main Authors: I Made Negara Sudirman, Andry Irwanto, Drs MBA Ak, Basuki, Drs.,M.Com(Hons).,PhD
• Format: Book Section PeerReviewed
• Language: English; English; English; English
• Published: Springer International Publishing AG. 2017
• Subjects: BF501-504.3 Motivation; HG4551-4598 Stock exchanges
• 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
• Institution: Universitas Airlangga

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.