Question

4. The disposition effect refers to the observation that: a. Individuals are more generous when the weather is sunny than when the weather is rainy. b. Individual are risk averse with respect to gains and risk seeking with respect to losses. c. Individuals are more willing to sell stocks that have gone up in value than stocks that have gone down in value. d. Individuals reject offers that would make them better off financially if those offers are perceived as being unfair. e. Individuals underestimate the extent to which savings will grow over time due to compounding.

Answer 1

Option C.

• The disposition effect refers to the observation that individuals are more willing to sell stock's that have gone up in value than stocks that have gone down in value.
• This effect is related to behavioural finance and it means that the investor's tend to hold the loosing stock for long and sell over the winning stock sooner as possible.
• This is because they are more willing to realise gains than to realise their losses.