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Prospect theory, liquidation, and the disposition effect / Vicky Henderson in Management science, Vol. 58 N° 2 (Février 2012) 

Public ISBD [article]  in Management science > Vol. 58 N° 2 (Février 2012) . - pp. 445-460 Titre : Prospect theory, liquidation, and the disposition effect Type de document : texte imprimé Auteurs : Vicky Henderson, Auteur Année de publication : 2012 Article en page(s) : pp. 445-460 Note générale : Management Langues : Anglais (eng) Mots-clés : Prospect  theory  Behavioral  finance  Disposition  effect  Liquidation  Optimal  stopping Résumé : There is a well-known intuition linking prospect theory with the disposition effect, the tendency of investors to sell assets that have risen in value rather than fallen. Recently, several authors have studied rigorous models in an attempt to formalize the intuition. However, some have found it difficult to predict a disposition effect while others produce a more extreme prediction where investors never voluntarily sell at a loss. We solve a model of asset liquidation where investors realize utility over gains and losses, and utility is concave over gains and convex over losses. Under the preferences of Tversky and Kahneman (Tversky, A., D. Kahneman. 1992. Advances in prospect theory: Cumulative representation of uncertainty. J. Risk Uncertainty 5(4) 297–323) and lognormal asset prices, investors exhibit a disposition effect as gains are realized at a greater rate than losses. Nonetheless, in contrast to the extant literature, we find that the investor will “give up” and sell at a loss when the asset has a sufficiently low Sharpe ratio. DEWEY : 658 ISSN : 0025-1909 En ligne : http://mansci.journal.informs.org/content/58/2/445.abstract [article] Prospect theory, liquidation, and the disposition effect [texte imprimé] / Vicky Henderson, Auteur . - 2012 . - pp. 445-460. Management Langues : Anglais (eng) in Management science > Vol. 58 N° 2 (Février 2012) . - pp. 445-460 Mots-clés : Prospect  theory  Behavioral  finance  Disposition  effect  Liquidation  Optimal  stopping Résumé : There is a well-known intuition linking prospect theory with the disposition effect, the tendency of investors to sell assets that have risen in value rather than fallen. Recently, several authors have studied rigorous models in an attempt to formalize the intuition. However, some have found it difficult to predict a disposition effect while others produce a more extreme prediction where investors never voluntarily sell at a loss. We solve a model of asset liquidation where investors realize utility over gains and losses, and utility is concave over gains and convex over losses. Under the preferences of Tversky and Kahneman (Tversky, A., D. Kahneman. 1992. Advances in prospect theory: Cumulative representation of uncertainty. J. Risk Uncertainty 5(4) 297–323) and lognormal asset prices, investors exhibit a disposition effect as gains are realized at a greater rate than losses. Nonetheless, in contrast to the extant literature, we find that the investor will “give up” and sell at a loss when the asset has a sufficiently low Sharpe ratio. DEWEY : 658 ISSN : 0025-1909 En ligne : http://mansci.journal.informs.org/content/58/2/445.abstract