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The disposition effect has been characterized in various ways: the effect, whereby investors are anxious to sell their winners, but reluctant to sell their losers (Shefrin 2005, 419); the tendency to hold losers too long and sell winners too soon (Odean 1998, 1775), and the effect, whereby investors sell winners more readily than losers (Odean 1998, 1779). Basically, the disposition effect says investors will sell winners and hold losers. The key point is there is nothing irrational about this behavior. It is consistent with maximizing expected utility given that the investor has the S-shaped utility function of prospect theory.

Suppose Xo = $500, h = $300, the risk averse utility function is U(x) = SQRT(x), and the risk seeking utility function is U(x) = SQRT(x).

#3.3. Use the utility table to show that the investor will sell a winner, i.e., show that the utility of Sell is greater than the expected utility of Hold.

#3.1. Fill in the GAINS case payoff table: Payoffs (in $) Selle Probability incremental gain (h) 0.52 i incremental loss (-h) 0.52 +#3.2. Fill in the GAINS case utility table: Utility (in U$) Selle Probability incremental gain (h) 0.52 tttt incremental loss (h) 0.52 the utilit table to choutbot the invoctor will collowinnor houtbot the utilitar #3.4. Fill in the LOSSES case payoff table: Payoffs (in $) Selle Holde Probabilitye 4 incremental gain (h) 0.52 I 1 incremental loss (-h) 0.52 #3.5. Fill in the LOSSES case utility table: Utility (in U($)) Holde Probability incremental gain (h) 0.52 I I incremental loss (-h) 0.52 #3.6. Use the utility table to show that the investor will sell a winner, i.e., show that the utility of Sell is greater than the expected utility of Hold. #3.1. Fill in the GAINS case payoff table: Payoffs (in $) Selle Probability incremental gain (h) 0.52 i incremental loss (-h) 0.52 +#3.2. Fill in the GAINS case utility table: Utility (in U$) Selle Probability incremental gain (h) 0.52 tttt incremental loss (h) 0.52 the utilit table to choutbot the invoctor will collowinnor houtbot the utilitar #3.4. Fill in the LOSSES case payoff table: Payoffs (in $) Selle Holde Probabilitye 4 incremental gain (h) 0.52 I 1 incremental loss (-h) 0.52 #3.5. Fill in the LOSSES case utility table: Utility (in U($)) Holde Probability incremental gain (h) 0.52 I I incremental loss (-h) 0.52 #3.6. Use the utility table to show that the investor will sell a winner, i.e., show that the utility of Sell is greater than the expected utility of Hold

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