Price path variability and the disposition effect: do volatile paths affect the decision to sell?
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2025-07-07
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en
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This study investigates whether price path variability influences the disposition effect, the tendency of investors to sell winning assets too early and hold on to losing assets too long. Based on prospect theory and prior work on visual risk perception, the study uses a survey experiment in which 124 participants are randomly assigned to one of three volatility treatments (low, average, or high). Each participant evaluates four price charts (two gain, two loss scenarios), generated using a Geometric Brownian Motion model, with visual volatility manipulated while holding trend, starting price, final price, and overall return constant across treatment groups. Willingness to sell is measured on a 7-point Likert scale, and the strength of the disposition effect is calculated as the difference between willingness to sell in gain versus loss scenarios. A one-way ANOVA reveals a statistically significant effect of volatility condition on disposition effect scores, with a Tukey HSD post-hoc test indicating that participants in the high-volatility condition exhibit a significantly stronger disposition effect than those in the low-volatility condition (p = .012). The findings suggest that higher visual volatility amplifies behavioral biases, highlighting the importance of graphical representation in financial decision-making.
Keywords: Price Paths, Disposition Effect, Investment Behavior, Behavioral Finance, Prospect Theory, Risk Perception, Volatility.
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Faculteit der Managementwetenschappen