IAI Actuarial Core Principles · Economic Modelling · Rational choice theory and utility
Which behavioural bias describes investors holding losing shares for too long while selling winning shares too early, treating the purchase price as the reference point?
This is the disposition effect. With the purchase price as the reference point, investors are risk averse over gains and risk seeking over losses, so they sell winners too early and hold on to losers too long.
- ADisposition effectCorrect
- BHome bias
- CHerding
- DMean reversion
- Money illusion
Explanation
The disposition effect follows from prospect theory: investors are risk averse over gains, so they realise them early, and risk seeking over losses, so they hold on hoping to break even. Herding is following the crowd, and home bias is overweighting domestic assets.
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