I Made Negara Sudirman and Andry Irwanto, Drs MBA Ak and Basuki, Drs.,M.Com(Hons).,PhD (2017) Disposition Effect on Investment Decision Making: Explanation of Regulatory-Focus Theory. In: Selected Papers from the Asia-Pacific Conference on Economics & Finance (APEF 2016). Springer International Publishing AG., Singapore, pp. 19-29. ISBN 978-981-10-3565-4, 978-981-10-3566-1 (eBook)

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Abstract

The disposition effect is the tendency of investors to sell stocks early when the price increases and hold stocks longer when this price decreases. As a consequence, investors may lose opportunities to gain greater profits from a stock winner whose price continues to rise; in contrast, they can suffer greater loss when the stocks continue to decline. The disposition effect is a phenomenon widely studied in behavioral finance. There are two main competing theories attempting to explain this phenomenon: the prospect theory and the regret theory. Although both theories give a fairly comprehensive explanation, they fail to take into account the motivation of investors in making investment decisions. This paper seeks to make a critical review of both of the main theories as well as provide a new explanation related to the motivation of investors from the perspective of the regulatory-focus theory. Regulatory-focus theory explains that individuals can be categorized into two groups, i.e. the prevention group and the promotion group. Regulatory-focus theory adds a more specific explanation that the disposition effect is more likely to occur in the prevention rather than the promotion group. The explanation of the disposition effect based on regulatory-focus -is a novelty in this paper.

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