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Affect account of disposition effect and consequences for stock prices

Tommy Gärling (Department of Psychology, University of Gothenburg, Göteborg, Sweden)
Mary Blomman (Department of Psychology, University of Gothenburg, Göteborg, Sweden)
Tim Alexander Carle (Universite du Luxembourg Faculte de Droit d’Economie et de Finance, Luxembourg, Luxembourg)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 10 July 2017




The purpose of this paper is to present an affect account that identifies emotions driving sell preferences in stock markets that result in the disposition effect (winning stocks hold too short and losing stocks too long) and to specify how stock prices are influenced.


The affect account is derived based on analyses of previous research showing the disposition effect, proposed explanations of the effect, and basic emotion research. An individual-level analysis is performed of the consequences for stock market prices.


The main proposal is that investors prefer to sell when price increases make the increasing balance of hope and fear equal to a faster increasingly balance of anticipated elation and disappointment, and when price decreases make the faster increasingly negative hope-fear balance equal to the increasing negative elation-disappointment balance. Steepness in slope of the negative hope-fear balance accounts for whether a loser is never sold (an extreme disposition effect), sold later than a winning stock (the usually observed disposition effect), or sold earlier than a winning stock (a reverse disposition effect). The individual-level analysis suggests that the affect-driven disposition effect would intensify or attenuate trends in stock prices depending on the demand-supply balance.


A conceptual contribution to research of emotion influences on stock trading and specifically to explanations of the disposition effect on sell decisions by less sophisticated and experienced investors.



Financial support for this research was obtained through Grant No. 2010‐02449 from the Swedish Agency for Innovation Systems (Vinnova) to the Center for Finance, School of Business, Economics, and Law, University of Gothenburg, Göteborg, Sweden.


Gärling, T., Blomman, M. and Carle, T.A. (2017), "Affect account of disposition effect and consequences for stock prices", Review of Behavioral Finance, Vol. 9 No. 2, pp. 187-202.



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