Advertisement

Annals of Finance

, Volume 5, Issue 1, pp 1–14 | Cite as

Behavior in a simplified stock market: the status quo bias, the disposition effect and the ostrich effect

  • Alexander L. Brown
  • John H. Kagel
Research Article

Abstract

Previous literature suggests specific behavioral tendencies cause investors to deviate from optimal investing. We investigate three such tendencies in a simplified stock market. Subjects do trade for better stocks, but do not reach their maximum potential earnings, most commonly because they choose to ignore information and continue to hold on to a stock regardless of its performance. The results support the predictions of the status quo bias, but not the ostrich effect or the disposition effect.

Keywords

Behavioral finance Experimental economics Status quo bias Self-signaling Disposition effect 

JEL Classification

C91 D01 D53 D83 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Benabou, R., Tirole, J.: Self-knowledge and self-regulation: an economic approach. In: Brocas, J., Carrillo, J.D. (eds.) The Psychology of Economic Decisions, vol. i. Rationality and well-being. Oxford: Oxford University Press (2002)Google Scholar
  2. Bodner, R., Prelec, D.: Self-signaling and diagnostic utility in everyday decision-making. In: Brocas, J., Carrillo, J.D. (eds.) The Psychology of Economic Decisions, vol. i. Rationality and well-being. Oxford: Oxford University Press (2002)Google Scholar
  3. Chui P.M.W. (2001). An experimental study of the disposition effect: evidence from Macau. J Psychol Financ Markets 2: 216–222 Google Scholar
  4. Galai D. and Sade O. (2006). The “ostrich effect” and the relationship between the liquidity and yields of financial assets. J Bus 79: 2741–2759 CrossRefGoogle Scholar
  5. Kahneman D. and Tversky A. (1979). Prospect theory: an analysis of decision under risk. Econometrica 47: 263–291 CrossRefGoogle Scholar
  6. Kahneman D. and Tversky A. (1982). The psychology of preference. Sci Am 246: 160–173 CrossRefGoogle Scholar
  7. Karlsson, N., Loewenstein, G., Seppi, D.J.: The “ostrich effect”: selective attention to information about investments. SSRN working paper (2005)Google Scholar
  8. Langer E.J. (1975). The illusion of control. J Pers Soc Psychol 32: 311–328 CrossRefGoogle Scholar
  9. Odean T. (1998). Are investors reluctant to realize their losses?. J Financ 53: 1775–1798 CrossRefGoogle Scholar
  10. Odean T. (1999). Do investors trade too much?. Am Econ Rev 89: 1279–1298 CrossRefGoogle Scholar
  11. Samuelson W. and Zeckhauser R. (1988). Status quo bias in decision making. J Risk Uncertain 1: 7–59 CrossRefGoogle Scholar
  12. Shefrin H. and Statman M. (1985). The disposition to sell winners too early and ride losers too long. J Finance 40: 777–790 CrossRefGoogle Scholar
  13. Stracca L. (2004). Behavioral finance and asset prices: where do we stand?. J Econ Psychol 25: 373–405 CrossRefGoogle Scholar
  14. Weber M. and Camerer C.F. (1998). The disposition effect in securities trading: an experimental analysis. J Econ Behav Organ 33: 167–184 CrossRefGoogle Scholar

Copyright information

© Springer-Verlag 2008

Authors and Affiliations

  1. 1.Division of the Humanities and Social SciencesCalifornia Institute of TechnologyPasadenaUSA
  2. 2.Department of EconomicsOhio State UniversityColumbusUSA

Personalised recommendations