1 / 10

An Experimental Approach

The Disposition Effect in the Venture Capital Decision-Making Process. An Experimental Approach. ESA World Meeting 2007, Rome Marta Maras Universitat Pompeu Fabra. MOTIVATION. DISPOSITION EFFECT (Shefrin&Statman, 1985)

avel
Download Presentation

An Experimental Approach

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. The Disposition Effect in the Venture Capital Decision-Making Process An Experimental Approach ESA World Meeting 2007, Rome Marta Maras Universitat Pompeu Fabra

  2. MOTIVATION • DISPOSITION EFFECT (Shefrin&Statman, 1985) • Tendency of investors to retain losing investments in their portfolios longer relative to their winning investments • Extension of prospect theory (Kahneman&Tversky, 1979) to investments • MY CONTRIBUTION • Context of venturecapital market (entry and exit investment situations) • Learning prior to decision making in experiments  controlled expertise • Competitive environment (venture selection) • Assessing costs and benefits of competition ESA World Meeting 2007, Rome

  3. LITERATURE REVIEW • DISPOSITION EFFECT (Shefrin&Statman, 1985) • MARKETS • Stocks (Odean, 1998; Ranguelova, 2001), Stock options (Heath et al., 1999), • Real-estate market (Genesove&Mayer, 2001), Futures (Heisler, 1994; Locke&Mann, 1999) • INVESTOR BEHAVIOUR • Above-average risks after losses (Coval&Shumway, 2005) • Profitability of momentum trading strategy (Grinblatt&Han, 2001) • Post-earnings announcement drift (Frazzini, 2006) • INVESTOR TYPE • Individual vs. professional (Shapira&Venezia, 1998) • Wealth, experience, trading frequency (Dhar&Zhu, 2005; Chen et al., 2004) • EXPERIMENTS • Share positions automatically closed (Weber&Camerer, 1998); Locus of control (Chui, 2001) • Markets with different trading mechanisms (Oehler et al.,2002) • Sunk costs&emotional commitment (Summers&Duxbury, 2005) • Stability across tasks and time (Weber&Welfens, 2006) ESA World Meeting 2007, Rome

  4. EXPERIMENTALDESIGN • DIAGRAM OF EXPERIMENTAL DESIGNPROCEDURE LEARNING STAGE * MCPL TASK CUE IMPORTANCE RANKING INVESTMENT STAGE *3 ROUNDS NO COMPETITION TREATMENT COMPETITION TREATMENT ASSIGNMENT TREATMENT VENTURE ASSIGNMENT VENTURE SELECTION VENTURE SELECTION VENTURE MANAGEMENT VENTURE MANAGEMENT VENTURE MANAGEMENT ESA World Meeting 2007, Rome

  5. EXPERIMENTALDESIGN INVESTMENT STAGE – INVESTMENT PROCESS OPTIMAL INVESTMENT STRATEGY • Invest full amount provided in t=0 (no cash) in 2 ventures with bestattribute values according to the cue model (due to upper bound onindividual venture investment) • Keep both in portfolio until t=5 by investing maximally in the more profitable venture ESA World Meeting 2007, Rome

  6. EXPERIMENTALDESIGN • DISPOSITION EFFECT (Shefrin&Statman, 1985) • Loss aversion is reflected in the significant difference between proportion of gains realised (PGR) and proportion of losses realised (PLR) PROPORTION OF GAINS REALISED = PROPORTION OF LOSSES REALISED = Disposition Effect:PGR > PLR ESA World Meeting 2007, Rome

  7. RESULTS (1) • Relevance of prior learning and competitive environment on the selling behaviour of individuals that were previously not included in the experimental studies of the disposition effect • No clear evidence of Disposition Effect – behavioural pattern in accordance with standard economic theory • General consistency in realising losses and apparent heterogeneity regarding realisation of gains • Lack of understanding of the experimental setting as a possible reason for disposition effect emergence? • Conflicting evidence in empirical studies (Feng and Seasholes (2005), Dhar and Zhu (2005) & Genesove and Mayer (2001) vs. Chen et al. (2004)) • Expertise Effect – Participants with higher levels of learning (reflected in judgement achievement components (ra, G and Rs)) had higher earnings in the experiment (investment stage) ESA World Meeting 2007, Rome

  8. RESULTS (2) • Participants held a more diversified portfolio and traded more often than optimal worsening their earnings • Treatment importance in selling behaviour influenced by the underlying return trends of portfolio ventures • The decisions on holding or leaving the losing compared to winning investments differ significantly conditional on the degree of competitive framing of the environment • Initial venture competition and interaction gave incentives for a more rational management of acquired ventures • Selling winners early decreases experimental earnings • Competition participants significantly better at venture management than No-Competition (t=2.48, p<0.02) and Assignment participants (t=-2.19, p<0.04) ESA World Meeting 2007, Rome

  9. RESULTS (2) • Optimal Strategy Analysis  tracing reasons for earnings’ decreases ESA World Meeting 2007, Rome

  10. THANK YOU! ESA World Meeting 2007, Rome

More Related