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Asset disposition effect: The impact of price patterns and selected personal characteristics

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The tendency of investors and managers to sell assets with gains early as opposed to assets with losses is called the asset disposition effect. An experiment was conducted to determine the impact of different price conditions and selected personal characteristics on the asset disposition effect. Support for the asset disposition effect was found in conditions where asset price was highly uncertain. None of the experiment participants' personal characteristics, however, was found to be a significant predictor of the disposition effect. The results indicate that the asset disposition behaviour could be explained by the mean reversion theory and participants' use of mental reference points. The possible presence of disposition effect in an investment asset market suggests that the use of mechanical rules, such as stop-loss orders, might improve the decision-making process of determining when to sell a losing asset. The reluctance to sell assets with declining values might not be optimal in some cases.Journal of Asset Management (2006) 7, 291–300; doi:10.1057/palgrave.jam.2240219
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Document Type: Research Article

Publication date: 2006-09-01

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