Neural insensitivity to upticks in value is associated with the disposition effect

Area of Science:

• Neuroeconomics
• Behavioral Finance
• Cognitive Neuroscience

Background:

• The disposition effect describes investors' tendency to sell winning assets too soon and hold losing assets too long.
• Common explanations involve risk aversion over gains and risk seeking over losses, or realization utility.

Purpose of the Study:

• To investigate the neural mechanisms underlying the disposition effect using fMRI.
• To test preference-based and realization utility explanations for the disposition effect.

Main Methods:

• Functional magnetic resonance imaging (fMRI) was used to measure brain activity.
• Participants decided whether to keep or sell assets with random price movements.
• Brain responses in valuation regions were correlated with disposition effect magnitude and risk preferences.

Main Results:

• No significant correlations were found between risk preferences, disposition effect magnitude, and brain activation.
• No differential brain responses supported the realization utility explanation.
• An attenuated ventral striatum response to gains below the purchase price was observed in individuals with a large disposition effect.

Conclusions:

• The disposition effect may be driven by a belief in mean reversion rather than risk preferences.
• Blunted striatal prediction error signals suggest an expectation of asset value recovery.
• This finding offers a novel neurobiological perspective on investor behavior and the disposition effect.