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An Experimental Approach

An Experimental Approach

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An Experimental Approach

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  1. The Disposition Effect in the Venture Capital Decision-Making Process An Experimental Approach ESA World Meeting 2007, Rome Marta Maras Universitat Pompeu Fabra

  2. 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 venturecapital 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, Rome

  3. 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, Rome

  4. EXPERIMENTALDESIGN • DIAGRAM OF EXPERIMENTAL DESIGNPROCEDURE LEARNING STAGE * MCPL TASK CUE IMPORTANCE RANKING INVESTMENT STAGE *3 ROUNDS NO COMPETITION TREATMENT COMPETITION TREATMENT ASSIGNMENT TREATMENT VENTURE ASSIGNMENT VENTURE SELECTION VENTURE SELECTION VENTURE MANAGEMENT VENTURE MANAGEMENT VENTURE MANAGEMENT ESA World Meeting 2007, Rome

  5. EXPERIMENTALDESIGN INVESTMENT STAGE – INVESTMENT PROCESS OPTIMAL INVESTMENT STRATEGY • Invest full amount provided in t=0 (no cash) in 2 ventures with bestattribute values according to the cue model (due to upper bound onindividual venture investment) • Keep both in portfolio until t=5 by investing maximally in the more profitable venture ESA World Meeting 2007, Rome

  6. EXPERIMENTALDESIGN • 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 = Disposition Effect:PGR > PLR ESA World Meeting 2007, Rome

  7. 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, Rome

  8. 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, Rome

  9. RESULTS (2) • Optimal Strategy Analysis  tracing reasons for earnings’ decreases ESA World Meeting 2007, Rome

  10. THANK YOU! ESA World Meeting 2007, Rome