Money, Sex, and Self Control: Predicting the Disposition Effect?

The widely-observed behavior of holding losing stocks longer than winning ones, is known as the disposition effect. This failure to realise paper losses is a major cause of eventual loss in investing. There is increasing evidence that financial choices, particularly those where there is threat of loss, such as the disposition effect, could be related to elements of psychophysiology. There is a well-known relationship between the psychophysiological and behavioral responses to threat and aspects of autonomic nervous system function. This study investigates the relationship between failure to realise paper losses during simulated stock trading and autonomic nervous system function as indexed by heart rate variability (HRV). Resting HRV was measured before participants played a stock trading game. After playing, a disposition effect index (DEX) was calculated for each player, from the time spent in losing stocks, as a proportion of total time in the market. HRV, specifically, a high level of high frequency HRV (HFHRV), is known to be significantly associated with reduced inappropriate responsiveness to threat, and inhibition of arousal. The group showed a significant inverse correlation between HF HRV ( %HRV) and DEX. This was carried mostly by males. Men who had a faster heart rate at baseline also held losing stocks longer, as did those with a higher LF/HF ratio. Men who have high HFHRV are more able to exert parasympathetic control over arousal, and are less likely to stay in losing stocks in a stock market trading game. The gender difference in correlations may be related to gender-specific responses to threat.