Prospect theory (PT) has long been linked with the disposition effect. Despite significant progress towards rigorously modeling the trading behavior of PT investors, the literature has been largely silent on the effect of probability weighting. In this paper we incorporate probability weighting...

A speculative agent with Prospect Theory preference chooses the optimal time to purchase and then to sell an indivisible risky asset as to maximize the expected utility of the round-trip profit net of transaction costs. The optimization problem is formulated as a sequential optimal stopping...

We estimate the disposition effect for active traders in a large discount brokerage dataset containing US households’ trading records between 1991 and 1996. We apply a wide framing perspective, focusing on portfolios rather than individual stocks. We find that the disposition effect varies...