Rationality of the Disposition Effect Through Framed Information of Target and Tolerance

Abstract

The disposition effect is a very well-known irrational decision in behavioral finance. Rational investors will maximize their wealth by holding the winning asset and selling the losing asset. Prospect theory explains the disposition effect due to the human tendency to avoid loss (loss aversion). This dissertation tries to understand the rationality of the disposition effect in a subjective context: selling target and tolerance level of retail investors. This research uses an experimental method to comprehend the rationality of the disposition effect based on the subjective target and tolerance. The target and tolerance level information is applied in the framing effect to mitigate the disposition effect. Furthermore, the duration of the exposure was also observed as a moderating variable. The result confirms the mitigating impact of framed information on the disposition effect. However, the duration has the opposite effect to the framing effect. The impact is that the disposition effect is enhanced for a longer duration. There is no moderating effect of duration to framed information and the disposition effect. An alternative measurement of the disposition effect improves the Weber measurement of the disposition effect.