Surprise Shocks!mpact of Extreme Return Experience on Taiwanese Individual Investors
Date Issued
2008
Date
2008
Author(s)
Sun, Ching-wen
Abstract
This paper investigates the influence of prior extreme gain and extreme loss experience on individual investors’ subsequent transactions. In general, individual investors lower their propensity to trade after they had experienced extremeness on their investment portfolio. Prior extreme gain experience and extreme loss experience both defer individual investors’ willingness to trade immediately. However, when investors execute a trade, an experience of extreme gain tends to encourage individual investors to sell more aggressively. House money effect is intensified after experiencing an extreme gain. In contrast, an extreme loss experience discourages individual investors from active trades. The discouragement from extreme loss experience is much larger than encouragement from an extreme gain experience. When examining investors’ selling behavior, our finding indicates that recallability affects investors to some extent, disposition effect dominates more. We also explore the situation faced by investors and find that investors are better off if they sell the same loser after prior extreme loss experience, and they are less happy if they sell the same winner after an extreme gain experience.
Subjects
extremeness
endowment effect
house money effect
disposition effect
fear of regret
Type
thesis
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