Prospect Theory, Reverse Disposition Effect and the Housing Market

Examining NFL betting contracts at Tradesports.com, we find mispricing consistent with the disposition effect, where investors are more likely to close out profitable positions than losing positions. Prices are too low when teams are ahead and too high when teams are behind. Returns following news events exhibit short-term reversals and longer-term momentum. These results do not appear driven by liquidity or non-financial reasons for trade. Finding the disposition effect in a negative expected return gambling market questions standard explanations for the effect (belief in mean reversion, prospect theory). It is consistent with cognitive dissonance, and models with time-inconsistent behavior.

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Unraveling the Disposition Effect: The role of prospect theory and emotions

PsycEXTRA Dataset ◽

10.1037/e722852011-064 ◽

2007 ◽

Cited By ~ 3

Author(s):

Barbara Summers ◽

Darren Duxbury

Keyword(s):

Prospect Theory ◽

Disposition Effect

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A Random Utility Model for Shareholders Capturing the Disposition Effect

International Journal of Applied Behavioral Economics ◽

10.4018/ijabe.2015040101 ◽

2015 ◽

Vol 4 (2) ◽

pp. 1-15

Author(s):

Alfred Ka Chun Ma ◽

Justina Yuen Ki Cheung

Keyword(s):

Prospect Theory ◽

Empirical Data ◽

Stock Price ◽

Historical Data ◽

Random Utility Model ◽

Disposition Effect ◽

Random Utility ◽

Utility Model ◽

Simulation Results

This work proposes a random utility model for individual trading decision in the spirit of prospect theory. This model differs from those in the literature in that empirical data of stock price and volume can be incorporated. The paper tests the model with historical data from the NYSE TAQ database. This model provides one more alternative to link prospect theory and the disposition effect. Simulation results show that this model consistently predicts the disposition effect under all circumstances.

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