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

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.

Citation:

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.