ESSAYS ON THE EFFECTS OF PAST GAINS ON SUBSEQUENT RISKTAKING AND STOCK RETURNS, ACTA UNIVERSITATIS OULUENSIS G Oeconomica 103
|Kustantaja:||Oulun yliopisto|| |
|Sijainti:||Print Tietotalo|| |
|Tekijät:||HAAPALAINEN TUOMO|| |
This dissertation contributes to the research on behavioral biases among individual investors by
demonstrating how investors increase their portfolio volatility, i.e., risk, following favorable
outcomes. This work also shows the influence of the first investment on subsequent risk-taking
preferences. It also shows how stock prices, through unrealized capital gains, create an evident
momentum effect following both bull and bear markets. The work is quite new because house
money, quasi-hedonic editing rules and mental accounting are not frequently used in the financial
literature. The data used are from the Finnish Central Securities Depository (FCSD), which is
unique in the financial research literature.
The results of the first essay indicate that individual investors purchase stocks that increase
portfolio risk or volatility after a period of negative market returns. These results propose that
investors attribute these returns to themselves. Therefore, they are supporting a self-attribution
bias. Ergo, investors gamble with their winnings over the next investment session. This behavior
is consistent with the house money effect, which has not been before analyzed in the background
of the stock market. Inexperienced investors are particularly prone to this effect.
The second essay investigates the effect of the outcome of the first investment on subsequent
risk-taking preferences, which has not been previously analyzed in the context of financial
markets. The database allows for analyses of new investors making their first stock market
investment. The results show that in first or subsequent investments the win effect is stronger. The
effect in the first investment situation results in higher volatility. Therefore, the result suggests that
realized money is more likely to be risked in the situation of the first stock than in the situation of
the other stocks.
The third essay, using a technique not before applied to research regarding momentum
asymmetry, shows that deviations from the holdings- or volume-based reference price, i.e., the socalled
capital gains overhang, can account for momentum. The results propose that after
accounting for the disposition effect, overconfidence and biased self-attribution are not able to
explain momentum asymmetry.