Abstract
With data collected from a directed social trading network, this paper investigates how social interaction affects the disposition effect. We constantly observe a negative association between them: After being exposed to social interaction, a trader’s odds ratio to sell a paper gain stock decreases by 9% to 10%, depending on different model settings. We then test the mechanisms of social interaction by decomposing it into three channels: learning intensity (willingness to learn), learning quality (information advantage through learning), and public scrutinization (exposure of trading outcome to others). We find that all three channels contribute to a smaller disposition effect. Specifically, our findings support the claim that public scrutinization promotes self-consciousness and reduces disposition effect. Also, our results extend previous studies on investors’ information advantage by suggesting that it could also help to mitigate the disposition effect through the reduction of uncertainty. Overall, this paper suggests a positive role of social trading platforms in helping investors make better decisions.
Highlights
The disposition effect is usually considered as an investment mistake: It describes the behavioral bias that investors sell wining assets too quickly while holding on to losers for too long [1]
This paper proposes a new method to decompose the effect of social interaction into three channels: learning intensity, learning quality, and public scrutinization
We investigate the role of social interaction in reducing investors’ disposition effect
Summary
The disposition effect is usually considered as an investment mistake: It describes the behavioral bias that investors sell wining assets too quickly while holding on to losers for too long [1]. Traditional explanations for the disposition effects often rely on personal preferences (e.g., Prospect Theory [1]) or personal attributes (e.g., investment experience [2, 3], education and learning ability [4]). How social interaction affects the disposition effect is much less discussed.
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