Beware of Performance Indicators

Abstract

Online trading interfaces are important instruments for retail investors. For sound reasons, regulators obligate online brokers to inform customers about certain trade related risks. Research has shown that different behavioral biases can decrease traders’ performance and hence lead to pecuniary losses. The disposition to hold losing stocks too long and sell winning stocks too early (‘disposition effect’) is such a deviation from rational behavior. The disposition effect is analyzed for the prediction market ‘Kurspiloten’ which predicts selected stock prices and counts nearly 2000 active traders and more than 200,000 orders. We show that the disposition effect can be aggravated by visual feedback on a trader’s performance via colored trend direction arrows and percentages. However, we find no evidence that such an interface modification leads to higher activity. Furthermore, we can not confirm that creating awareness of the disposition effect with textual information is suited to decreasing its strength.