Abstract
This paper investigates the relationship between disposition effect and escalation of commitment in securities trading. First, we developed an investment simulation system, that manipulated five stocks' price during thirty-six periods to test investors' behavioral patterns in securities trading. Then, we investigate whether the gain ratio or loss ratio impacts on disposition effect and escalation of commitment after controlling other variables. The results summarized as follow: First, investors are exhibited disposition effect and escalation of commitment in securities trading. Second, sex, education, duration of securities trading, and investment amount did not affect the disposition effect and escalation of commitment. Third, disposition effect and escalation of commitment has negative impact on performance. Finally, we find individual investors with stronger disposition effect are more likely to be escalated in securities trading.
Highlights
In the traditional financial theory, rational investors makes investment decisions based on the characteristics of investment portfolio risk; prior studies show that the disposition effect do exist in investment
The results shows that the selected variables have no significant effect on the index of disposition effect and the index of escalation of commitment, which is inconsistent with the previous findings
Our analysis show the disposition effect and the escalation of commitment in securities trading
Summary
In the traditional financial theory, rational investors makes investment decisions based on the characteristics of investment portfolio risk; prior studies show that the disposition effect do exist in investment. There are two insufficient places in these studies Most of these studies were based on indirect data, such as fund transaction data and questionnaire, which makes difficult to investigate individual investors' behavior. These studies have explained the causes of escalation of commitment and disposition effect, these studies ignored the intrinsic linkages between the two kinds of behavior. We tested the impact of these variables, such as sex, education, duration of securities trading, and investment amount to disposition effect and escalation of commitment. We find the relationship between disposition effect and escalation of commitment in securities trading
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