COMPARING INVESTOR’S BELIEFS ABOUT THE FUTURE RETURNS FOR WINNER AND LOSER STOCKS.

Abstract

What are the future return expectations of investors after experiencing a gain or loss in the financial market? In this research is the demonstration of no difference in future return beliefs and trading behaviour in a gain and loss domain. In an experimental setting with actual stock data, I analyse the influences of gain and loss domains on investors future beliefs and trading behaviour. The results show that return expectations between the loss and gain domain are identical. Thus, there is no substantive difference in the trading behaviour between the gain and loss domain. However, the perceived risk in the loss domain is more heightened compared to the gain domain by people. Additionally, I find that people tend to hold on to stocks in the face of firm optimistic future beliefs. Therefore, the disposition effect disappears to avoid regret in the future.