A Model of Investment Decision Making: How Adaptation to Losses Affects Investors’ Selling Decisions

Carmen Lee, VU University Amsterdam, The Netherlands
Roman Kraeussl, VU University Amsterdam, The Netherlands
Andre Lucas, VU University Amsterdam, The Netherlands
Leonard J. Paas, VU University Amsterdam, The Netherlands
To provide more insight into investors’ selling decisions, an integrated model of prospect theory, reference point adaptation and cognitive-experiential self-theory is proposed. We expect that the dynamically changing reference point, together with changing emotions and changing expectation for a stock’s future performance, influence the decision to hold or sell losing investments. Experimental findings demonstrate a main effect of positive expectations on the decisions to hold. Also, larger total loss size and longer time in losing position are related to a more downwardly shifted reference point. This adapted reference point indirectly decreases the probability to hold the investment, via its impact on expectations.
[ to cite ]:
Carmen Lee, Roman Kraeussl, Andre Lucas, and Leonard J. Paas (2009) ,"A Model of Investment Decision Making: How Adaptation to Losses Affects Investors’ Selling Decisions", in NA - Advances in Consumer Research Volume 36, eds. Ann L. McGill and Sharon Shavitt, Duluth, MN : Association for Consumer Research, Pages: 606-606.