Disposition effects in stock investment: The role of regulatory focus and counterfactual thinking

Abstract

Through this research, the roles of regulatory focus alongside counterfactual and semifactual thinking are examined in the context of behavioral finance, in particular a??disposition effect. Disposition effect is observed when investors sell winning stocks too quickly and hold on to losing stocks for too long (Odean 1998). More specifically, we propose that disposition effect in the stock investment is moderated by regulatory focus as well as the counterfactual and semifactual thoughts that are generated. We predict that promotion-focus tend to display disposition effect under falling stock prices (losing stocks) while prevention-focus conversely displays disposition effect under rising stock prices (winning stocks). In addition, we examine evidence of disposition effect in the short term(speculative investments) and long term (fundamental or value investments).Two studies are proposed for this research a?? the first study examines how choice decisions and outcome valence (success, failure and non-event) can generate counterfactual, semifactual and factual thoughts, inducing affective, attribution, and attitudinal responses in consumer purchase context; while the second study looks to explore how disposition effect in stock investment is transpired as a result of the roles of regulatory focus, counterfactual and semifactual thinking.