At the Top of the Mind: Peak Prices and the Disposition Effect

The disposition effect is the reluctance to sell assets at a loss relative to a salient point of reference. Typically, that referent has been assumed to be the purchase price, but other values can also assume prominence as reference points. Drawing on a model of multiple reference points, we test the idea that the peak price achieved by an asset constitutes an additional salient reference point for asset owners that overlaps, and interacts, with the purchase price reference point. We demonstrate this using administrative data documenting price changes and selling decisions for both housing and stocks.