Piotr Zielonka

A Detailed Prospect Theory Explanation of the Disposition Effect

The disposition effect has been characterized in various ways: the “effect, whereby investors are anxious to sell their winners, but reluctant to sell their losers” (Shefrin [2005], pp. 419); “the tendency to hold losers too long and sell winners too soon” (Odean [1998], pp. 1775) and the effect, whereby investors “sell winners more readily than losers” (Odean [1998], pp. 1779). The most discernable aspect of these characterizations is their imprecision, particularly with regard to time. In what follows, we provide a detailed explanation of the disposition effect based on a straightforward application of prospect theory (Kahneman and Tversky [1992]; Kahneman and Tversky [1979, 2000]). The analysis begins with the traditional account of the disposition effect (Shefrin and Statman [1985]) and provides precise time-independent concepts that replace “sell too soon” and “hold too long.” The analysis shows when the prospect theory explanation of the disposition effect requires only the valuation function and when the explanation requires both the valuation function and the probability weighting function.

Expert Judgments: Financial Analysts Versus Weather Forecasters

Two groups of experts, financial analysts and weather forecasters, were asked to predict corresponding events (the value of the Warsaw Stock Exchange Index and the average temperature of the next month). When accounting for inaccurate judgments, we find that weather forecasters attach more importance to probability than financial analysts. Although both groups revealed the overconfidence effect, it was significantly higher among financial analysts. These results are discussed from the perspective of learning from experience.

Perception of randomness and predicting uncertain events

Using randomly generated sequences of binary events we asked participants to make predictions about the next event. It turned out that while predicting uncertain events, people do not behave unsystematically. Our research identifies four types of relatively consistent strategies for predicting uncertain binary events: a strategy immune to short-run sequential dependencies consisting of the persistent prediction of long-run majority events, hereafter called the long-run momentum strategy; a strategy immune to short-run sequential dependencies consisting of the persistent prediction of long-run minority events, called the long-run contrarian strategy; a strategy sensitive to short-run sequential dependencies consisting of the prediction of short-run majority events, called the short-run momentum strategy; and a strategy sensitive to short-run sequential dependencies consisting of the prediction of short-run minority events, called the short-run contrarian strategy. When the character of events remains unknown, the most common strategy is the short-run momentum strategy. With the increase of a perceived randomness of the situation, people tend more often to use the short-run contrarian strategy. People differ in their general beliefs about the continuation or reversal of a trend in various natural and social processes. Trend believers, when facing sequences of binary events commonly perceived as random, tend to use momentum strategies, whereas those who believe in the trends reversal tend to use contrarian strategies.

Impulsive people have a compulsion for immediate gratification-certain or uncertain.

Impulsivity has been defined as choosing the smaller more immediate reward over a larger more delayed reward. The purpose of this research was to gain a deeper understanding of the mental processes involved in the decision making. We examined participants’ rates of delay discounting and probability discounting to determine their correlation with time-probability trade-offs. To establish the time-probability trade-off rate, participants adjusted a risky, immediate payoff to a delayed, certain payoff. In effect, this yielded a probability equivalent of waiting time. We found a strong, positive correlation between delay discount rates and the time-probability trade-offs. This means that impulsive people have a compulsion for immediate gratification, independent of whether the immediate reward is certain or uncertain. Thus, they seem not to be concerned with risk but rather with time.

Standing in Your Peer's Shoes Hurts Your Feats: The Self-Others Discrepancy in Risk Attitude and Impulsivity

It is often a good strategy to “stand in the other person’s shoes” to see a situation from a different perspective. People frequently attempt to infer what someone else would recommend when no advisor is available to help with a decision. Such situations commonly concern intertemporal or risky choices, and the usual assumption is that lay people make such decisions differently than experts do. The aim of our study was to determine what intertemporal and risky decisions people make when they take their own perspective, the perspective of a peer, and the perspectives of an expert or an entrepreneur. In a series of three experiments using a between-subject design, we found that taking the peer’s perspective made participants behave more impulsively and more risk aversely in relation to the participants’ own perspectives and in relation to their perceptions of experts and entrepreneurs perspectives. Taking an expert’s or an entrepreneur’s perspective did not change participants’ own intertemporal and risky decisions. We explain the findings using the risk as value and the lesser mind theories. Imagining the opponent’s perspective in a negotiation as one is advised to do might inadvertently lead to problems because we always see her as more impulsive and more risk averse than she really is. This means that taking a perspective of an expert – not a peer – would be a good way to predict what decisions our opponents make.

A belief in trend reversal requires access to cognitive resources

ABSTRACT There are two research traditions studying peoples reactions to random binary events: one concerns serial choice reaction times, the other concerns predictions of events in a series. The present studies focused on comparing expectations between these two approaches. We formed and tested a general hypothesis that, regardless of the type of task, when an individual faces a sequence of events they initially expect trend continuation. Only when people assume that a sequence is random might they override the default and expect trend reversal instead. In a series of experiments we found that limitation of access to cognitive resources enhances expectations of trend continuation. Our interpretation of this finding is that an expectation of trend continuation is the default for the human cognitive system and that a belief in trend reversal requires access to cognitive resources to overcome the tendency to expect trend continuation.

Large risks with low probabilities: Perceptions and willingness to take preventive measures against flooding

Polish Journal of Economic Psychology | psychologia-ekonomiczna.com.pl | 61 Coraz częściej w serwisach informacyjnych napotykamy nagłówki artykułów dotyczące anomalii pogodowych. Oto kilka przykładów: „Natura jest zdezorientowana”, „Pogoda w ostatnich miesiącach zaskakuje nawet meteorologów”, „Nienaturalnie wysokie temperatury w rejonach środkowych i południowych Włoch”, „Na północy Hiszpanii zapanowała prawdziwa zima”, „Najgorętsze i najbardziej nieprzyjazne człowiekowi miejsce na planecie – amerykańska Dolina Śmierci – okryła się dywanem rzadkich, wiosennych kwiatów”, „Wielkie powodzie nękają kraje w Europie Środkowej i Chiny”. Cytowane nagłówki dotyczą zdarzeń, które występują relatywnie rzadko i jednocześnie mają bardzo negatywne konsekwencje. Nasuwają się pytania, jak reagujemy na takie wiadomości, jak oceniamy prawdopodobieństwo takich zdarzeń, czy jesteśmy skłonni wykupić ubezpieczenie od ich skutków. Odpowiedzi na powyższe pytania możemy znaleźć w monografii Large Risks with Low Probabilities: Perceptions and Willingness to Take Preventive Measures against Flooding pod redakcją Tadesza Tyszki i Piotra Zielonki. W pierwszym rozdziale Tadeusz Tyszka i Piotr Zielonka wprowadzają czytelnika w problematykę ryzyka zdarzeń o małych prawdopodobieństwach na przykładzie ryzyka środowiska naturalnego. Autorzy zwracają uwagę na rolę emocji, uprzedniego doświadczenia skutków katastrof naturalnych i norm społecznych na proces postrzegania ryzyka oraz na decyzje o podjęciu działań zabezpieczających. Tematy te są rozwinięte w pierwszej części książki poświęconej problemom percepcji ryzyka. Julija Michailova, Tadeusz Tyszka i Katarzyna Gawryluk w drugim rozdziale starają się odpowiedzieć na pytanie o to, co wpływa na poszukiwanie informacji o prawdopodobieństwie klęsk żywiołowych przez podejmujących ryzykowne decyzje. Z kolei Katarzyna Idzikowska, Rafał Muda, Sabina Kołodziej i Piotr Zielonka wskazują czynniki wpływające na przeszacowanie lub Recenzja monografii „Large Risks with Low Probabilities: Perceptions and Willingness to Take Preventive Measures against Flooding” pod redakcją Tadeusza Tyszki i Piotra Zielonki

Framing, czyli efekt sformułowania

A slight difference in the message formulation may lead to a different behavior of the recipient. This phenomenon is called the framing effect. The article describes three types of framing: the risky choice framing effect, the attribute framing effect and the goal framing effect. It has been shown that the phenomenon responsible for framing effect is, commonly occurring in humans, a strong loss aversion. Examples of the implementation of framing in various economic areas, such as price policy, taxation, or negotiation, are discussed.

High Volatility Eliminates the Disposition Effect in a Market Crisis

The disposition effect is an effect whereby investors tend to sell winning stocks and tend to hold losing stocks. This inclination is detrimental for investment results. Dacey and Zielonka (2008) showed the impact of the probability of further stock price rise under low stock price volatility on the disposition effect. Specifically, they showed that under low volatility, in the case of a gain, the investor is more likely to sell the winner even if the probability of the further gain is high, whereas in the case of a loss, the investor is more likely to hold the loser even when the probability of a further gain is small. In this paper we examined the disposition effect under high volatility. The general conclusion is that under high volatility, in the case of a gain, the investor behaves in the same way as for low volatility, whereas in the case of a loss, the investor is less and less likely to hold the loser as volatility increases. Thus, in the case of a loss under high volatility, the investor acts contrary to the disposition effect. This result explains the panic selling of stocks during a market collapse.