Seminar on ‘Impact of Price Path on Disposition Bias’ by Prof. Joshy Jacob, Associate Professor at IIM Ahmedabad
Abstract of the seminar
Recent experimental studies have illustrated the influence of price-path, particularly the‘non-straight’ price-path on several aspects of investor behaviour. The paper computes a proxy for price-path based on Cumulative Prospect Theory and with investor-level high-frequency trade data from the commodities futures market, we demonstrate that the nature of price-path significantly impacts the degree of disposition bias, after controlling for the level of returns and volatility of the commodity. We find that the experience of a favourable (unfavourable) price-path, decreases (increases) disposition bias among the traders with Prospect Theory preferences. The decline (increase) in disposition bias is an outcome of the decline (increase) in the propensity for gain realization, accompanied by a concurrent increase (decline) in the propensity for loss realization among the traders. Our findings imply that the investor preferences, as well as their beliefs about the future price movements, inferred from the price-path, experienced, jointly influence their trading decisions.