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The disposition effect calculation can change based on experimental design. Disclosing final balances shifts reference points from average to first purchase price, impacting selling decisions.

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Area of Science:

  • Behavioral Finance
  • Experimental Economics
  • Decision-Making

Background:

  • The disposition effect, a well-documented bias, is typically computed using the average purchase price as the reference point.
  • Existing research often assumes a static reference price in behavioral finance studies.
  • The influence of experimental design on reference price formation remains underexplored.

Purpose of the Study:

  • To investigate whether the reference price used in calculating the disposition effect is malleable.
  • To examine the impact of experimental behavioral design on participants' reference price selection.
  • To determine if disclosing final balances alters the reference point for selling assets.

Main Methods:

  • A laboratory experiment was conducted with two groups: a control group and a treatment group.
  • Participants' decisions regarding the disposition effect were analyzed under different experimental conditions.
  • The treatment group experienced a condition involving the disclosure of their final account balances.

Main Results:

  • In the control group, no significant differences in disposition effect computation were observed across different reference prices, supporting the use of the average purchase price.
  • Participants in the treatment group exhibited statistically significant differences in reference prices used for the disposition effect.
  • The requirement to display final results led treatment group participants to adopt the first purchase price as their reference point when selling assets.

Conclusions:

  • The default computation of the disposition effect using average purchase price is challenged by this study.
  • Experimental behavioral design, specifically the disclosure of final balances, can significantly alter reference price formation.
  • Future research should consider the dynamic nature of reference prices in behavioral finance models.