Centre for Experimental Methods and Behavioural Research Seminar with Prof Darren Duxbury (Newcastle)

Decomposing Unrealized Returns into Adapted and Unadapted Components Using Reference Points

Abstract

Previous research shows that realized and unrealized outcomes influence subsequent risk-taking behavior, albeit in opposite ways. We further decompose unrealized outcomes into adapted and unadapted components, which have distinct implications for risk-taking. Adapted returns are internalized as individuals adjust their reference point, while unadapted returns remain externalized. Our empirical evidence shows that adapted and unadapted returns exert opposing influences on future stock returns. Notably, the highest-performing stocks have a distant past return that is low (reflecting an adapted loss) paired with a recent past return that is high (reflecting an unadapted gain).

About the speaker

Professor Duxbury is an international expert in the areas of experimental and behavioral finance. He publishes in world-leading, internationally excellent, academic journals, including Management Science, Organizational Behavior and Human Decision Processes, British Journal of Management, and Journal of Banking and Finance, along with Journal of Empirical Finance, European Journal of Finance, Journal of International Financial Markets Institutions and Money, International Review of Financial Analysis, Review of Quantitative Finance and Accounting, Journal of Economic Behavior and Organization, Economics Letters, Accounting and Business Research and British Accounting Review. His interdisciplinary work is published in international journals across various disciplines, including Risk Analysis, Journal of Economic Psychology, Legal Studies and Sustainability.  He is the author of two invited review papers in the Review of Behavioral Finance, a research monograph on repeated financial decision making and presents regularly at international conferences.