The Hedonic Editing Hypothesis: Evidence from the Finnish Stock Market
Prospect theory-based hedonic editing hypothesis posits that people integrate or segregate multiple outcomes so as to achieve the highest perceived value. We test the hypothesis in an actual decision-making context by investigating how stock market investors time their sales of stocks when realizing gains and losses. If the principles that guide investors' behavior are those suggested by the hedonic editing hypothesis, we should observe investors integrating losses more frequently than gains and integrating smaller losses with larger gains rather than the other way around. Our results do not conclusively support either of these assumptions but suggest that the relationship between prospect theoretic preferences and investor behavior is not as general as it might seem.