Debiasing the disposition effect by reducing the saliency of information about a stock's purchase price

Journal of Economic Behavior & Organization
Cary Frydman, Antonio Rangel

Abstract

The disposition effect refers to the empirical fact that investors have a higher propensity to sell risky assets with capital gains compared to risky assets with capital losses, and it has been associated with low trading performance. We use a stock trading laboratory experiment to investigate if it is possible to reduce subjects' tendency to exhibit a disposition effect by making information about a stock's purchase price, and thus about capital gains and losses, less salient. We compare two experimental conditions: a high-saliency condition in which the purchase price of a stock is prominently displayed by the trading software, and a low-saliency condition in which it is not displayed at all. We find that individuals exhibit a disposition effect in the high-saliency condition, and that the effect is 25% smaller in the low-saliency condition. This suggests that it is possible to debias the disposition effect by reducing the saliency with which information about a stock's purchase price is displayed on financial statements and online trading platforms.

References

Dec 14, 2004·NeuroImage·K J FristonS Kiebel
Sep 14, 2010·Nature Neuroscience·Ian KrajbichAntonio Rangel
Jul 29, 2011·The Journal of Neuroscience : the Official Journal of the Society for Neuroscience·Todd A HareAntonio Rangel
Aug 3, 2011·Proceedings of the National Academy of Sciences of the United States of America·Ian Krajbich, Antonio Rangel
Mar 17, 2015·The Journal of Finance·Cary FrydmanAntonio Rangel

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