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)overconfidence.
B)arbitrage theory.
C)the disposition effect.
D)the house money effect.
E)a confirmation bias.

Question

Quizplus · Accepted Answer

Phil's behavior is consistent with the disposition effect, which is the tendency for investors to hold on to losing investments while selling winning investments. By instructing Mike to sell stocks that have increased in value, Phil is displaying a desire to lock in his gains and avoid the potential of losses. Additionally, by instructing Mike to retain stocks that will result in a capital loss if sold, Phil is displaying a reluctance to sell losing investments.

Mike Is a Stock Broker and Financial Planner