Mike is a stock broker and ﬁnancial planner. Phil is one of Mike's clients. Phil prefers to meet with Mike just once a year to review his investment portfolio. At their most recent meeting, Phil stated he
Believes the stock market is going to decline in value over the next six months. Thus, Phil instructed
Mike to sell every stock he owns that is currently worth more than what he paid to purchase it. Phil
Also instructed Mike to retain any stock that would create a capital loss if sold. Phil is displaying the
Behavior known as:
A) Over-conﬁdence.
B) Arbitrage theory.
C) The disposition effect.
D) The house money effect.
E) A conﬁrmation bias.

Question

Quizplus · Accepted Answer

Phil is displaying the disposition effect, which is the tendency for investors to hold on to losing investments and sell winning investments. This behavior is driven by the emotional pain of realizing losses and the desire to experience the emotional high of a winning investment. Phil's instruction to retain stocks that would create a capital loss if sold is an example of this effect, as he is choosing to hold onto losing investments in the hope that they will eventually rebound.

Mike Is a Stock Broker and ﬁNancial Planner