טכניון מכון טכנולוגי לישראל
הטכניון מכון טכנולוגי לישראל - בית הספר ללימודי מוסמכים  
M.Sc Thesis
M.Sc StudentAndrey Kudryavtsev
SubjectOn the Reference Point Underlying Investors' Behavior
DepartmentDepartment of Industrial Engineering and Management
Supervisor Full Professor Kliger Doron


Abstract

In the present work, we concentrate on one of the most striking behavioral biases - the tendency of investors to sell assets that gained value and to hold on to assets that lost value. This phenomenon is known as the “disposition effect”. Prospect theory by Kahneman and Tversky, which provides the behavioral explanation of the disposition effect, is crucially based on the concept of a reference point - an internal psychological benchmark distinguishing between the gains and the losses. Yet, previous economic literature does not reach an exhaustive understanding of the actual reference point guiding the investors in their decision-making process. In light of the aforesaid, we wish to shed light on the process of reference point formation. The main goal of our work is to establish if some company-specific events affect the reference point of the investors trading the stocks of the respective firm. Using stock data and data on quarterly earnings announcements for a sample of firms, we employ an innovative empirical technique, and document the existence of the disposition effect with the stock price at the day of the earnings announcement as an implied reference point. This finding leads us to the major conclusion that investors update their reference levels following salient company-specific events. A series of empirical and analytical tests we perform in the framework of the present research, also allows us to reach some additional inferences with respect to the factors which influence the salience of events from the investors’ viewpoint, implicitly driving them to update their reference point.