Are Institutional Investors Reluctant to Realise Losses?

Order Description

Please try not to use more than 5 internet sources. Use academic papers please!!

First, just an outline about my dissertation:

My research subject is in the field of behavioural finance – not just any finance.

The empirical test of my dissertation (which I am currently doing) is to investigate whether institutional investors exhibit a behavioural bias named loss aversion, which is highly related to the behavioural anomaly in Finance named the disposition effect (the disposition effect refers to investors’ tendency to sell shares whose price has increased, while being reluctant to sell shares that have dropped in value as they don’t want to make a loss (i.e. realise loss) and believe the share price will climb back up);

Essentially my research methodology is based on the one used in the paper named “Is the Aggregate Investor Reluctant to Realise Losses? Evidence from Taiwan” written by Barber et al. (2007). – so this is definitely a key paper to read and to refer to in the literature review chapter that I am asking you to write for me.

Second, let’s talk about what I hope you could write for me:

I am asking you to write 2 chapters – the introduction as well as the literature review chapter – for my dissertation.

The introduction chapter should be short (I am thinking no more than 1000 words) and its content should include:

1. A short description of what is behavioural finance (use a reference from a paper that gives a definition of behavioural finance); Use some quotes by famous people if possible.

2. What are the key differences between behavioural finance theory and traditional finance theory (especially talk a bit about the assumptions of traditional finance and one of them is how it assumes investors to be rational individuals)
3. Talk about traditional finance in the context of Efficient Market Hypothesis – also brief;
4. Talk briefly about what loss aversion and disposition effect are.

I say no more 1000 words because after I am done with my methodology I will add some stuff in the introduction anyways.

The Literature review chapter should take up the remaining word limit: so around 5300 words and it should include 4 sections (but feel free to restructure)

one section (say section 2.1.) should be discussing what behavioural finance is (use references please).

Also go more in-depth on the differences between behavioural finance and traditional finance (using tables if necessary)

Talk about the implications of behavioural finance, how it may affect investing for both retail and institutional investors

Section 2.2

Throw in examples of behavioural biases, and talk about academic papers that investigated these biases and these papers’ findings and maybe the methodologies used too;

referring to empirical evidence and talk about whether it’s retail investors or institutional investors or both that suffer behavioural biases when investing

Here I will give you a list of behavioural biases that you can talk about; It’d be good to show good understanding of these biases, their implications and empirical studies’ methodologies used to test them, and discuss the pros and cons of these studies’ dataset used, testing period and etc

Here is the list:

Overconfidence:
relevant papers: – B. Barber and T. Odean, (2001), “Boys Will be Boys: Gender, Overconfidence, and Common Stock Investment”, The Quarterly Journal of Economics, vol. 116, no. 1, pp. 261-292.

Framing bias – paper: A. Kumar, S. S. Lim, (2008), “How do Decision Frames Influence the Stock Investment Choices of Individual Investors?”, Management Science, vol. 54, pp. 1052-1064.

Status quo biases:

revelant papers:
Barber, Odean, and Zhu (2003) report that retail investors tend to buy those stocks they bought before. Kempf & Ruenzi (2005) found that status quo prevails among mutual fund investors.

and other biases:

Representativeness – good to talk about
Familiarity bias – good to talk about
Mental Accounting – good to talk about
Hindsight bias
The urge to get even
Confirmation bias
Sunk cost fallacy
Endowment effect
Conjunction fallacy

I will also post a reading list later from which you may be able to find relevant papers but if you don’t find them from my reading list, please make the effort to look for them online (good journal papers please)

for example, you can write about 4-5 biases and put the rest of them in a table with relevant research paper and these papers’ findings

Ideally Section 2.2 should be able to link to the next section i.e. section 2.3.

Section 2.3 should focus on talking about loss aversion & disposition effect & prospect theory;

This is expected to be the most important section as this dissertation is about testing whether institutional investors exhibit loss aversion
So:
1. Go in-depth on what loss aversion and disposition effect are

2. What are prospect theory, expected utility theory and how do they relate to loss aversion and disposition effect

3. Talk about empirical evidence findings & the methodology used by prior researchers to test loss aversion – I will post some notes and some parts of a paper later which I believe are useful in looking for empirical evidence.

4. Make the differentiation between institutional and retail investors – what does empirical evidence suggest; do more sophisticated institutional investors also exhibit loss aversion or is it only retail investors who exhibit loss aversion? And why do/don’t institutional investors suffer this bias?

Key papers in this section are:
Kahneman and Tversky, (1979); Shefrin and Statman (1985); Thaler (1985) mental accounting; Odean (1998); Barber et al. (2007);

Use empirical evidence from papers referenced in the above-mentioned papers and from my notes and from the parts of a paper I will be posting

Many more papers can be found in my notes and from the parts of a paper I will be posting.

5. Try to find evidence about short-sellers suffering from behavioural biases (esp. loss aversion), mention them separately please in a different section (say 2.4.1)

Please feel free to restructure the literature review chapter to what you believe is the best; Have more subsections if you think it’s better to do so.
Also feel free to contact me if there is anything you need more clarification on and want to discuss with me about anything.