Promotion and Prevention Focus Orientation in Mitigating the Disposition Effect

We explore the role of self-regulatory orientations on the disposition effect (DE), the propensity of investors to sell assets at gain faster than those at loss. We hypothesize that both promotion and prevention focus oriented investors will exhibit a reduced DE but through different behavioral mechanisms. Promotion-oriented investors are prone to hold winning stocks in favor of higher returns, while prevention-oriented investors stress a stop-loss strategy to avoid negative outcomes. In two studies, we combine measurement and experimental manipulations of self-regulatory orientations with individual financial data from a trading exercise. For a sample of 171 participants (Study 1, N = 128; Study 2, N = 43), we show that a promotion focus induces investors to wait before selling winners (lower DE); under a prevention focus, investors exhibit a tendency to cash in loss rapidly (lower DE). This is found to hold for regulatory focus experienced as both psychology states and traits.