Integrating narrow and wide framing disposition effect: A novel approach incorporating perceived risk and realized asset performance

Abstract

This paper proposes an integrated framing approach to investigate the disposition effect by linking it to regret and prospect theory. We build upon the wide framing hypothesis and extend prior research by including metrics of perceived risk and the number of days stocks are at a gain. Using a sample of 24 million trading operations conducted by nearly 4,000 Italian investors from 2010 to 2018, we demonstrate that investment decisions are influenced not only by portfolio aggregate performance but also by asset trading history and perceived volatility. Our results align with several theoretical frameworks that could explain the disposition effect, such as mental accounting, prospect theory and regret aversion. Furthermore, by incorporating both narrow and wide framing factors, along with their interactions, our approach provides a more comprehensive understanding of the disposition effect.