Is the disposition effect related to investors' reliance on System 1 and System 2 processes or their strategy of emotion regulation?

Richards, D, Fenton-O'Creevy, M, Rutterford, J and Kodwani, D 2018, 'Is the disposition effect related to investors' reliance on System 1 and System 2 processes or their strategy of emotion regulation?', Journal of Economic Psychology, vol. 66, pp. 79-92.


Document type: Journal Article
Collection: Journal Articles

Title Is the disposition effect related to investors' reliance on System 1 and System 2 processes or their strategy of emotion regulation?
Author(s) Richards, D
Fenton-O'Creevy, M
Rutterford, J
Kodwani, D
Year 2018
Journal name Journal of Economic Psychology
Volume number 66
Start page 79
End page 92
Total pages 14
Publisher Elsevier
Abstract We report research on investor susceptibility to the disposition effect, a financial decision-making bias where investors have a greater propensity to realize gains than realize losses. Despite theoretical arguments for the influence of emotions, research on susceptibility to this bias, on real investors, has relied primarily on socio-demographic explanations. Some experimental research on student populations has considered emotions more directly, but has not addressed differences in individual susceptibility and has not examined genuinely consequential investor behaviour in real markets. Our research addresses this gap by predicting susceptibility to the disposition effect based on investors' reliance on intuitive (emotion mediated) cognition (System 1), analytical cognition (System 2) and the strategies they use to regulate their emotions. Using investors' trading records from a UK sample, we measure their susceptibility to the disposition effect and assess, through a questionnaire, their reliance on Systems 1 and 2 cognitive processes and use of two emotion regulation strategies. Investors with higher reliance on System 1 processes have greater disposition effect, but reliance on System 2 processes is not related to the disposition effect. Investor reliance on reappraisal (an emotion regulation strategy of changing a situation's meaning to alter its emotional impact) reduces their disposition effect. However, the use of expressive suppression (a strategy that inhibits emotion expressive behaviour) does not show a statistically significant relationship with this bias. These results suggest that investors' intuitive emotional reactions explain susceptibility to bias, and that effective strategies of regulating emotions enable this bias to be overcome.
Subject Investment and Risk Management
Organisational Behaviour
Decision Making
Keyword(s) Disposition effect
dual-process theory
emotion regulation
financial decision-making bias
behavioral finance
DOI - identifier 10.1016/j.joep.2018.01.003
Copyright notice © 2018 Elsevier B.V. All rights reserved.
ISSN 0167-4870
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