Abstract
The disposition effect refers to the tendency of investors to sell winners too early and hold on to losers too long, which is one of the most documented and robust decision biases. However, few studies have looked beyond demographic and social factors on the disposition effect. The current study investigated the association between financial self-efficacy (FSE) (one’s belief about their personal capability in ultimate financial goals achieving), versatile cognitive style (an individual’s capability in deploying the experiential or rational mode in ways that are contextually appropriate), and the disposition effect. A total of 285 employees from finance-related business completed anonymous questionnaires regarding FSE, rational-experiential inventory, and the disposition effect. Our findings revealed that FSE was significantly and positively associated with versatile cognitive style and the disposition effect. Further, versatile cognitive style partially mediated the relationship between FSE and the disposition effect. Our findings provide valuable guidance for individual investors to make financial decisions based on their characteristics.
Highlights
The disposition effect refers to investors’ tendency to sell winning stocks too early and keep losing stocks too long (Shefrin and Statman, 1985)
financial self-efficacy (FSE) was positively associated with versatile cognitive style
The current study extends the literature by looking beyond demographic and social factors, and investigates the association between FSE, versatile cognitive style and the disposition effect
Summary
The disposition effect refers to investors’ tendency to sell winning stocks too early and keep losing stocks too long (Shefrin and Statman, 1985). Some empirical studies have found that higher level of FSE is associated with stronger saving intentions and more saving behavior (Xiao et al, 2011; Magendans et al, 2017), suggesting a risk-averse tendency among people with FSE Taken together, these findings suggest FSE may contribute both to risk-taking in the loss domain and risk-aversion in the gain domain, resulting in greater disposition of selling winning stocks too early and holding losing stocks too long. The present study extends existing research by empirically examining the association between FSE, versatile cognitive styles, and the disposition effect with two hypotheses. We assume that self-efficacy in the financial domain would positively predict the disposition effect (Hypothesis 1); second, we predicted that versatile cognitive styles would mediate the association between FSE and the disposition effect (Hypothesis 2)
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