The Disposition Effect and Individual Investor Decisions: The Roles of Regret and Counterfactual Alternatives

Recent studies have documented a strong tendency for individual investors to delay realizing capital losses, while realizing gains prematurely (Odean [1996], Shefrin and Statman [1985], Weber and Camerer [1996]). This tendency has been termed the "disposition effect." The disposition effect is inconsistent with normative approaches to stock sales, such as those based on tax losses (see, for example, Constantinides [1983]). We surveyed individual investors, and found that more respondents reported regret about holding on to a losing stock too long than about selling a winning stock too soon. This finding suggests that individual investors are consistently engaging in behavior that they have been warned can cost them money and that they regret later. Two additional experiments confirm the disposition effect and the role of regret, and offer evidence about the role of an agent (broker) in the assignment of blame and regret. We show that investor satisfaction and regret are not simply functions of outcome, but are influenced by counterfactual alternatives and the type of action taken (holding versus selling). We suggest that the disposition effect may be highly related to reduction of anticipated regret.     

个体特质、信息获取与风险态度——来自中国股民的调查分析

本文利用中国6个城市的733位股市投资者的调查数据,分析了投资者的风险偏好状况及其影响因素。研究显示,我国投资者的总体风险态度是风险规避型的,进一步的多变量Logit回归分析发现,投资者的部分个体特质(比如受教育程度、职业)、个人财富状况会显著影响投资者的风险偏好;投资经验的积累会降低其风险系数。一个创新的研究结果是投资者获取信息的渠道和对媒体的信任程度会对投资者风险态度有显著影响,具体来说,信息来源更为丰富的渠道会提高投资者的风险偏好程度,而对新闻媒体的信任程度越低,风险偏好程度也会提高。这些研究结论对券商有针对性的进行客户管理、证券监管部门加强投资者的风险控制、新闻媒体的监管等等,都有重要的政策意义。     

Financial advice and individual investors’ investment decisions

Findings from previous studies generally indicate that relying on advice from financial advisors is associated with investment decisions. This study uses data from the 2013 Survey of Consumer Finances (SCF) to mainly investigate three types of advisors: (a) financial planners, (b) accountants, and (c) lawyers. Getting investment advice from financial planners is found to be positively associated with stock ownership, while this relationship is negative for individual investors relying on advice from lawyers. Evidence from this study also suggests that some personal characteristics, such as age, education, risk tolerance may play a key role in shaping individual investors’ investment decisions.     

Attitudes and Trading Behavior of Stock Market Investors: A Segmentation Approach

This study identifies and characterizes segments of individual investors based on their shared investing attitudes and behavior. A behavioral finance literature review reveals five main constructs that drive investor behavior: investment horizon, confidence, control, risk attitude, and personalization of loss. Ninety individual investors were surveyed via questionnaire on these constructs. A cluster segmentation analysis identified four main segments of individual investors: 1) risk-intolerant traders; 2) confident traders; 3) loss-averse young traders; and 4) conservative long-term investors. Each segment purchased different types of stocks, used different information sources, and had different levels of trading behavior.     

Do Institutional and Individual Investors Differ in Their Preference for Financial Skewness?

Employing a unique sample of individual and institutional investors, we conduct experiments to determine investors’ preference for (or indifference to) financial skewness. We present investors with a series of stocks with varying levels of skewness. Using Instant Response Devices, we then collect investors’ choices to hold or sell each stock. Among stocks with equal expected returns, we find strong evidence that the sample investors use a prospect theory utility function rather than a mean-variance expected utility function to decide to sell or hold stocks. In the loss domain, we find that investors are ambivalent about the choice between positively and negatively skewed stocks. However, in the gain domain, we find that both individual and institutional investors prefer negatively skewed stocks—a contrast from previous research suggesting that individuals (and not institutional investors) prefer positive skewness. We also find evidence suggesting that reference points are important in financial decision making.     

Analysis of long-run benefits from international equity diversification between Taiwan and its major European trading partners: an empirical note

This paper employs four cointegration test approaches, PO, HI, JJ and KSS, to test for pairwise long-run equilibrium relationships between Taiwan's stock price index and each of the stock price indexes of four European markets – French, German, Dutch, and British stock markets. The results from these four tests are robust and clearly consistent in suggesting that the Taiwan stock market is not pairwise cointegrated with the four European stock markets. This provides strong evidence that there exist long-run benefits for Taiwan investors diversifying in the equity markets of Taiwan's major European trading partners, France, Germany, Holland, and the UK, over the sample period considered from 6 January 1998 to 30 May 2002. These findings could be valuable to Taiwan individual investors and financial institutions holding long-run investment portfolios in the equity markets of France, Germany, Holland, and the UK.     

Stock returns and mutual fund flows in the korean financial markets: a system approach

ABSTRACT

This paper investigates dynamic and causal relations between stock returns and mutual fund flows in Korea using a system method that utilizes information from the stock, bond, and money markets. For this purpose, we employ the Dynamic Seemingly Unrelated Regression, the Seemingly Unrelated Regression Error Correction Model, and two causality tests in a system method to account for cross-equation correlations among markets that have a close relationship with one another. Furthermore, we use the information in the variance-covariance matrix of residual to improve the efficiency of the statistical estimates. The empirical evidence from the system method indicates that fund flows do not respond to eliminate deviations from long-run equilibrium, and stock prices cause net fund flows in the Korean market, implying that investors move their money to the securities that yield higher returns to rebalance their investment portfolios in the short-run. Thus, our findings do not support the popular notion of mutual fund flows as the driving force behind rallies in the Korean financial markets.     

The relationship between the Vietnam stock market and its major trading partners – TECM with bivariate asymmetric GARCH model

This study employs threshold error-correction model with bivariate Glosten–Jagannathan–Runkle-generalized autoregressive conditional heteroscedasticity model to examine the relationship between the Vietnam stock market and its major trading partners, the United States, Japan, Singapore and China. The results indicate that the Vietnam stock market and return risks are influenced by Japan and Singapore stock markets. We also find that the volatility of stock market in Vietnam and its trading countries have an asymmetrical effect. These findings could be valuable to individual investors and financial institutions holding long-run investment portfolios in the Vietnam stock market.     

个人投资者交易行为研究——来自台湾股市的证据

本文基于台湾股市数据,主要研究个人投资者的交易行为。参照Kaniel et al.(2008)构建了个人投资者交易不平衡性指标─净交易,以反映投资者股票交易的强度。采用这种交易不平衡性指标来构建投资组合研究个人投资者的交易行为。首先研究个人投资者交易和股票的收益之间的动态关系从而分析投资者的交易策略,然后研究个人投资者净交易的收益预测能力从而分析个人投资者交易的信息含量。本文研究发现:台湾股票市场的个人投资者采用负反馈的交易策略,并且个人投资者在交易中表现出很强的处置效应;个人投资者在交易中的信息含量不足;个人投资者交易中的盈利主要来自两个方面:过度反应和价格冲击。文章最后给出政策建议。     

Investment coordinates in the context of housing and stock markets nexus

This study examines the causal relationship between Chinese housing market (HM) and stock market (SM), using the bootstrap Granger full-sample causality test and subsample rolling-window estimation test. The results show that stock price (SP) has both positive and negative impacts on housing price (HP) in several sub-periods, and HP has the same effects on SP. The substitution effect drives their adverse consequences. Meanwhile, the positive effect indicates that SP has a wealth effect on HP, and HP has a credit-price effect on SP. Results provide information to Chinese financial institutions and individual investors for constructing investment portfolios within these asset markets.     

Financialization and commodity prices – an empirical analysis for coffee,cotton, wheat and oil

Commodity prices have crucial implications for developing countries. The question whether the financialization of commodity derivative markets has contributed to high and volatile commodity prices has been controversially debated. Building on limitations in the empirical literature, we estimate a multivariate Vector Autoregressive (VAR) model to assess the effect of different groups of financial investors (index investors and money managers) as well as fundamental and macroeconomic variables on the prices of coffee, cotton, wheat and oil. We find that, in contrast to index investors, money managers’ net long positions have a large statistically significant effect on commodity prices. This calls for policy interventions as commodity derivative markets may cease to perform their fundamental developmental roles.     

中小投资者羊群行为的多阶段模型探究

在中国的股票市场中,中小投资者虽是弱势群体,但其数量却占了股市投资者总数的大部分,其投资行为将直接决定着大盘走势和股票市场的波动情况。文章借鉴传染病模型,建立金融市场上中小投资者羊群行为的多阶段模型,就金融市场信息的不对称性与投资者的认知水平等影响金融市场上中小投资者羊群行为的阶段行为特征进行了深入分析,并有针对性地提出相关建议。     

Are Malaysian Investors Rational?

This paper examines the investment practices of Malaysian institutional investors during the bullish and bearish periods. The factors and forces that drive the Malaysian stock market are also identified. The investors used a lot of information within and outside the firm before making any stock selection. The analysis of fundamentals appears to be the most popular method for share appraisal. The survey findings demonstrated that Malaysian investors appeared to be rational and prudent in making financial decisions.     

中国股票市场个体投资者"处置效应"的实证研究

利用中国个体投资者交易帐户的交易数据,本文对中国股票市场个体投资者"处置效应"进行了实证分析,并考察了中国股票市场是否存在"十二月效应"对"处置效应"的影响.依据情绪影响投资者决策的心理学结论,本文进一步分析了在不同的市场态势下,个体投资者"处置效应"的特征.本文研究表明,中国个体投资者存在显著的"处置效应",并在不同市场态势下表现出不同的特征,十二月份存在"反处置效应"现象.     

Diversification versus optimality: is there really a diversification puzzle?

In this paper, we provide a general valuation of the diversification attitude of investors. First, we empirically examine the diversification of mean-variance optimal choices in the US stock market during the 11-year period 2003–2013. We then analyze the diversification problem from the perspective of risk-averse investors and risk-seeking investors. Second, we prove that investors’ optimal choices will be similar if their utility functions are not too distant, independent of their tolerance (or aversion) to risk. Finally, we discuss investors’ attitude towards diversification when the choices available to investors depend on several parameters.     

CSR,rationality and the ethical preferences of investors in a laboratory experiment

This experimental study aims to clarify to what extent and in which direction investors react to CSR (Corporate Social Responsibility) initiatives meant to upgrade the ethical standards of firms beyond the minimal requirements of law. Subjects in the laboratory were invited to invest their endowment in a portfolio of financial assets. We provided information on the expected returns of each stock and on its inclusion in an ethical index, or exclusion from it. Our findings show that subjects’ behavior appears to be a function not only of their individual pay-offs but also of the information on the ethical standards of the firms issuing stocks. Most of them, however, did not show a fully irrational behavior as they consistently correlated the share of stocks with their expected returns. We may conclude that the sizeable reaction of our investors to the inclusion of a stock in the ethical index, or its exclusion from it, is the fruit of a deliberate choice.     

Stock Market Fluctuations and Money Demand in Italy, 1913–2003

This paper examines the impact of stock market fluctuations on money demand in Italy from a long‐run perspective. The money demand function estimated by Muscatelli and Spinelli (2000) for a long time span is utilized as a benchmark, adding to the specification information on share prices from the Milan Stock Exchange Reform of 1913 to recent years. For a shorter time period (1938–2003), annual observations on stock market capitalization and turnover velocity are also considered. The empirical findings suggest that stock market fluctuations help to explain temporary movements in liquidity preference, rather than its secular patterns. Overall, a positive association emerges between an index of stock market prices that includes dividends and real money balances; however, the estimated long‐run relationship is unstable. In a dynamic, short‐term specification of money demand, the estimated coefficient of deflated stock prices is positive, and therefore compatible with a wealth effect, in the years 1913–1980, while in the last two decades a substitution effect has prevailed and the correlation between money and share prices has been negative. This is likely to reflect a change in financial structure and the increasing role of opportunity costs defined over a wider range of assets. These results are confirmed by data on stock market capitalization. Moreover, in the recent period, stock market turnover and money growth are positively correlated .     

股指期货在风险管理中的应用

股指期货属于金融期货的一种,是以股票市场的股票价格指数为标的物的期货合约.在很多发达的股票市场乃至资本市场中,股指期货扮演着规避风险、套期保值的重要角色.在利用股指期货对股票组合进行套期保值时,可能面临各种风险,其中,基差风险是套期保值者面临的最主要风险.利用向量误差修正模型可以估计最小风险套期保值比,为投资者综合选择风险最小的套期保值策略提供了现实的、可操作的定量分析工具.     

Compensation schemes,liquidity provision,and asset prices: an experimental analysis

In an experimental setting in which investors can entrust their money to traders, we investigate how compensation schemes affect liquidity provision and asset prices, two outcomes that are important for financial stability. Compensation schemes can drive a wedge between how investors and traders value the asset. Limited liability makes traders value the asset more than investors. To limit losses, investors should thus restrict liquidity provision to force traders to trade at a lower price. By contrast, bonus caps make traders value the asset less than investors. This should encourage liquidity provision and increase prices. In contrast to these predictions, we find that under limited liability investors increase liquidity provision and asset price bubbles are larger. Bonus caps have no clear effect on liquidity provision and they fail to tame bubbles. Overall, giving traders skin in the game fosters financial stability.     

Measuring Financial Risk Attitude: How to Apply Both Regulatory and Scientific Criteria to Ensure Suitability

Due to regulatory requirements, assessing investors' attitude toward financial risks is becoming increasingly important for advisors. To address this, the authors aimed to develop a risk attitude questionnaire, based on existing instruments, which fulfills both regulatory and scientific criteria. They conducted a survey on real investors and linked the survey data to actual portfolio data to test the validity of the instrument. The risk attitude index the authors developed uses only 6 easy-to-understand items, is reliable (Cronbach's α = 0.88), and explains substantial amounts of variance (R² = 0.40) in the investors' behavior. It therefore fulfills regulatory and scientific criteria.