טכניון מכון טכנולוגי לישראל
הטכניון מכון טכנולוגי לישראל - בית הספר ללימודי מוסמכים  
M.Sc Thesis
M.Sc StudentVaknin Avshalom
SubjectThe Disposition Effect under the Magnifying Glasses of
Priming
DepartmentDepartment of Industrial Engineering and Management
Supervisor Professor Doron Kliger
Full Thesis text - in Hebrew Full thesis text - Hebrew Version


Abstract

The purpose of this study is to determine if the size of the “Disposition Effect” is affected by “priming.” A study such as this makes it possible to measure whether the size of the Disposition Effect is affected by psychological processes and can teach us about the behavioral patterns of investors.

The “Disposition Effect” refers to the phenomenon whereby investors are inclined to sell stocks that have appreciated too early, while holding stocks that have depreciated too long. The Disposition Effect can be explained by findings which show that individual preferences are based on “prospect theory” as well as their own psychological considerations. According to prospect theory, utility is attributed to profit or loss, relative to the point of reference, which is the initial purchase price of the stock. In addition, there is a tendency to seek out risk when looking at a possible loss, while ignoring the possibility that profitability is on the way.

In contrast, one of the riddles of financial economics is the fact that the risk premium of many assets varies greatly over time. Investors demonstrate risk aversion anti-cyclically - they are less risk averse during periods of plenty when compared to periods of depression, during the business cycle. These behaviors lead to the question of whether or not the strength of the Disposition Effect is influenced by priming. “Priming” is a process that helps distort the way in which people think, relate to things, and make decisions, through an inculcation of concepts and ideas before the decision is made.

The current study includes three main experiments. The first is designed to validate the Disposition Effect. In this section, a computerized experiment simulates the trading process in “the financial arena.” The second experiment was designed to test whether the strength of the Disposition Effect is influenced by priming, which either discourages or encourages risk taking. The last experiment looked at whether the strength of the Disposition Effect is influenced by priming related to capital markets in terms of whether they go up or down.

The results of both of the first experiments support the hypotheses of the study. According to the data, the Disposition Effect exists. The subjects tended to sell more stock when prices went up than when they went down. In the second experiment, the subjects who were exposed to priming via stories designed to dissuade them from taking risks, tended to sell more “winning” stocks than “losing stocks,” as opposed to subjects who were exposed to stories designed to encourage risk taking. For the third experiment the hypothesis was not supported.

This study regarding the Disposition Effect, influenced by priming, could be used by decision makers and even investment advisers to recognize that investors ignore the possibility of losses, since they tend not to take a loss. It may very well be that despite the psychological influence on economic information, investors would learn to act in a more rational way.