Download - An Experimental Approach
An Experimental Approach
ESA World Meeting 2007, Rome
Marta MarasUniversitat Pompeu Fabra
The Disposition Effect in the Venture Capital Decision-Making Process
ESA World Meeting 2007, RomeJune 29, 2007
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 venture capital 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, RomeJune 29, 2007
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, RomeJune 29, 2007
EXPERIMENTAL DESIGN
DIAGRAM OF EXPERIMENTAL DESIGN PROCEDURE
NO COMPETITIONTREATMENT
LEARNING STAGE* MCPL TASK
CUE IMPORTANCERANKING
INVESTMENT STAGE*3 ROUNDS
COMPETITION
TREATMENT
ASSIGNMENTTREATMENT
VENTURE MANAGEMENT
VENTURE ASSIGNMENT
VENTURE SELECTION
VENTURE SELECTION
VENTURE MANAGEMENT
VENTURE MANAGEMENT
ESA World Meeting 2007, RomeJune 29, 2007
EXPERIMENTAL DESIGN
OPTIMAL INVESTMENT STRATEGY
t=0 t=1 t=2 t=3 t=4 t=5
ECU 1,000,000 ECU 800,000 ECU 600,000 ECU 400,000 ECU 200,000 PAYOFF
Venture Selection
Investment or Exit
Investment or Exit
Investment or Exit
Investment or Exit
Fund Closing
INVESTMENT STAGE – INVESTMENT PROCESS
Invest full amount provided in t=0 (no cash) in 2 ventures with best attribute values according to the cue model (due to upper bound on individual venture investment) Keep both in portfolio until t=5 by investing maximally in the more profitable venture
ESA World Meeting 2007, RomeJune 29, 2007
EXPERIMENTAL DESIGN
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 =
GAINS PAPER GAINSREALISED GAINSREALISED
LOSSESPAPER LOSSESREALISED LOSSESREALISED
Disposition Effect: PGR > PLR
ESA World Meeting 2007, RomeJune 29, 2007
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, RomeJune 29, 2007
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, RomeJune 29, 2007
RESULTS (2)
Optimal Strategy Analysis tracing reasons for earnings’ decreases
Learningb Consistencyc Managementd
NO COMPETITION 0.22 0.05 0.04 0.13
ASSIGNMENT 0.23 0.07 - 0.14
COMPETITION 0.34 0.10 0.18 0.07
Note: Sample size N=60. a comparison between the optimal and actual earnings of participantsb comparison between the optimal earnings and maximal earnings according to the participants' models from the learning stage (given optimal venture choices)c comparison between the maximal earnings given optimal venture choices according to the participants' models and maximal earnings given their actual venture choices. The comparison cannot be calculated for Assignment treatment due to venture assignment feature in period t=0.d comparison between the maximal earnings given actual venture choices of participants and their actual final earnings
Decrease due to
TREATMENT
Total Decrease
in Earningsa
ESA World Meeting 2007, RomeJune 29, 2007
THANK YOU!