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Revisit the Disposition Effect under Uncertainty

The Disposition Effect (DE) is one of the most stable and widely discussed "behaviour biases" in the field of behavioural finance. In Statman and Shefrin's (1985) original paper, they use the term DE to describe such a pattern: "investors sell the winner too early and ride the losers for too long".

Existing works on DE mostly rely on the prospect theory and consider the decision-making process behind DE a risk choice task (where the probability and possibility of the outcomes are explicitly described, such as the gamble tasks in Kahneman and Tversky, 1970). We revisit the DE under different situations: certain risks vs. uncertainty using our novel real-time trading paradigm.

We found that DE only exists in the situation of uncertainty and can be reversed when the risks are explicitly described. Using the hierarchical drift diffusion models, we found that such difference is associated with the difference in the information process efficiency.

Y., Ding, M., Speekenbrink.(in prep.) Revisit the Disposition Effect: A Novel Real-time Trading Paradigm.

Contrast the perceptual and financial decision-making

Consider the following task: there are two urns with green and red balls, there are 40 green balls and 60 red balls in one urn and 60 green balls and 40 red balls in the other. An experimenter continuously draws balls from an urn and the participant's task is to figure out whether this urn is the green-dominated one or the red-dominated one.

Real life financial decision-making (e.g., stock investment) shares mostly the same perception with such a perceptual decision-making task. Then, the question is: if such tasks are equivalent, how and why do people perform differently in these tasks?

We compared the participants' behaviour and cognition while facing two similar real-time perceptual decision-making tasks with almost everything the same except for the scenarios.

We found the financial choices were significantly slower and less accurate than the perceptual choices. Computational models reveal asymmetrical information processing efficiency in buying vs. selling but not in detecting upward trends vs. downward trends.

Y., Ding, D., Goncalves, M., Speekenbrink. (2025). Perceptual vs. Financial Choices: Behavioural and cognitive contrasts. Experimental Psychology Society London Meeting 2025

Y., Ding, D., Goncalves, M., Speekenbrink. (2025). Watch out for Bears: Do People Behave Differently in Perceptual and Financial Decisions? CogSci 2025, Cognitive Science Society