Probability weighting, stop-loss and the disposition effect

• 成果类型: Article
• 署名作者: Henderson, Vicky; Hobson, David; Tse, Alex S. L.
• 署名单位: University of Warwick; University of Cambridge; Imperial College London
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2018.10.002
• 发表日期: 2018
• 页码: 360-397
• 关键词: Prospect theory; behavioral economics; Disposition effect; Investor trading behavior; probability weighting

摘要

In this paper we study a continuous-time, optimal stopping model of an asset sale with prospect theory preferences under pre-commitment. We show for a wide range of value and probability weighting functions, including those of Tversky and Kahneman (1992), that the optimal prospect takes the form of a stop-loss threshold and a distribution over gains. It is skewed with a long right tail. This is consistent with both the widespread use of stop-loss strategies in financial markets, and recent experimental evidence. Moreover, our model with probability weighting in tandem with the S-shaped value function makes predictions for the disposition effect which match in magnitude that calculated by Odean (1998). Crown Copyright (C) 2018 Published by Elsevier Inc. All rights reserved.