This final speaker in this semester’s SWE Colloquium series is Tobin Hanspal, Assistant Professor, Research Center SAFE, University of Frankfurt, who visits on Thursday 7 June.

Market Expectations and Investment Behavior: The Case of the Disposition Effect

 We study the relationship between market expectations, preferences, and investment behavior. We analyze individuals’ portfolio investments alongside a laboratory experiment eliciting incentivized subjective beliefs, risk preferences, and financial sophistication. Our sample consists both of investors who previously exhibited a high degree of the disposition effect as well as a control group. We find that disposition-prone investors expect a market return on a balanced portfolio of assets to be approximately 5 percentage points greater than other investors, an economically significant effect relative to a mean expected return of 14%. Moreover, we find that elicited beliefs predict future investment behavior, including the incidence of the disposition effect, as well as risk taking in general. Surprisingly, our characterizations of risk preferences are not related to the incidence of disposition effect – neither in the past nor after the experiment. Our results suggest that optimism or differences in expectations may be important aspects of the disposition effect – and thus potentially for many other documented behavioral investment biases