Poverty and Children in the United States Essay Example for Free

Poverty and Children in the United States Essay Poverty is the classification of people that fall under a certain income bracket set by the government. Poverty is broken down in to two groups relative and absolute. Relative poverty is in relation to some people have more where as absolute poverty is considered life-threatening. Poverty affects people of age, race and ethnicity, and gender and family patterns. Each group that is affected typically carries the pattern from one generation the next generation making the social status difficult to change (Macionis, 2006). Although poverty can affect many different types of people those most affected by poverty are the children and women which make up 55 percent of the poor population. There continues to be blame on why people are poor and why they cannot change their lives to do better. Some people believe that it is an endless battle and once poor always poor and it is too difficult to change living situations. Poverty affects children in many ways health, food, shelter, education and exposure to violence. The cause of poverty to children is directly related to poverty in women. The beliefs of the causes of poverty according to the Encyclopedia of Women and Gender (2001), â€Å"Individualistic beliefs focus on personality attributes. These beliefs include irresponsibility, lack of discipline and effort, or lower ability and talent. Structuralistic beliefs incorporate the larger socioeconomic system such as low wages for some jobs, poor schools, prejudice, discrimination, and job availability. Fatalistic beliefs as to the reasons for a persons poverty status focus on such things as bad luck, chance, and fate.† Most poverty that affects women are those that are single mothers although these women worked they made too much for public  assistance but not enough to be able to take care of themselves and their children with proper housing, food, clothing and health care. The lack of health care directly relates to the health of children. When a mother cannot afford health care for herself during pregnancy, health issues are passed to the child. The child is then born with health issues that will continue to go untreated due to lack of health care. The single mother that makes too much to qualify for public assi stance, does not make enough to purchase medical coverage for herself and her family (Encyclopedia of Women and Gender (2001). In 1996, policies to the welfare system were changed greatly. Agencies could cut assistance to families without notice. Only women with a child under that age of one were able to get assistance without much red tape. Most states allowed people to be on assistance for a maximum of two years. There were programs designed to help women get jobs and off welfare but federal minimum wage is not enough to support a family. Without welfare assistance women and their children fall back into poverty (Encyclopedia of Women and Gender (2001). According to Duncan, G., Yeung, W., Brooks-Gunn, J., and Smith, J. (1998), there are many factors the most significant is the relation to the paternal social economic status and how it effects to the child’s and adults achievements. Most that is in a poor social status tend to be poorly educated and have children out of marriage which add an extra strain to the families which can result in physical harm to the child. Adults with children that struggle to feed, clothe and house their children are easily stressed and at times react in extreme punishment to the children blaming the child for the situation that the family is currently in. Once children are exposed to domestic violence and violence upon themselves then the cycle usually cont inues from generation to generation. Not being able to break the cycle can be a factor of poor education. Poor education is part of living in poor cities urban and rural. Families that are poor are only accepted by those that are like them, poor. So families that are in these communities seem to be stuck in the social status and cycle. Not knowing how to get out or afraid to get out of that status. If that status is something a person has always known some will not think anything different than that status being a normal way of life. According to Fantuzzo, J., Fusco, R., Mohr, W., Perry, M. (2007), during violence witnessed by children the perpetrators were more likely to be  arrested then times when children were not present. The police officers were concern that it was of great importance to send a message the violence is wrong. When it comes to domestic violence children are likely to have serious issue with development. These children tend to be more withdrawn from others and have poor social skills. There are many agencies that help assist the children in cases where the children are in danger from others. Such agencies are child protected services (CPS). Services such as CPS assist in placing child in home that will help to protect them from violence and neglect. With all of the research that has been done on how violence affects children in poverty there is no accuracy to the full impact of violence and children. According to Koch (2000), â€Å"The child poverty rate has declined slowly since 1993, and the rate of black child poverty is the lowest in history. But 13.5 million American children still live in poverty the highest rate of any industrialized country. Conservatives attribute the decline to welfare reform, which forced millions of single welfare mothers to go to work. But child advocates like the Childrens Defense Fund say that progress in reducing child poverty has slowed markedly and that cuts in social service programs made the poorest families poorer.† Today the rich still get richer and it seems that the poor continue to get poorer and the children of these poor families are the ones that are suffering the most. Most of the child poverty is in inner cities (urban areas). Families move to urban areas for better opportunities for themselves and their families but it has not improved these families quality of life. These families want to give their children a better chance to succeed by moving to these urban areas but that idea seems to be failing. Some will say that these families suffer from being dependent on welfare dependency but in truth these child suffer because wages are to low and housing is too high for their par ents to be able to make ends meet and try to get ahead of the system. With welfare assistance these children would not have food to eat and medical care. Welfare assistance assists the parents to help provide for the child when their financial income does not adequately provide for the child (Koch, 2000). The United States is supposed to have the most wealth but with that wealth the United States also has the highest child poverty as illustrated in the above chart (Koch, 2000). Most families that fall in to the poverty level make minimum wage jobs and will never be able  to get out of the poverty level. With these families they are usually poor educated which greatly impacts their earnings. Since some families work more than one job to try to make ends meet there is not time to try to better educate them. The children of these families learn from example and will continue to develop the habits of their parents. Working low paying jobs to provide food, clothing and shelter from their children will continue to be the pattern and education will be far down on the list (Koch, 2000). There has been some change to welfare reform law called Charitable Choice, this changes has made it easier for the government to be able to contract religious groups to provide social services to the poor. Many programs have come from this reform like Big Brothers/Big Sisters which is a mentoring program that helps children see a different way of life and have a positive role model to help encourage these poor children to stay in school, go to college and understand that though they may come from poor families does not mean that they have to continue in the path of their parents. These programs help children to gain confidence in the child. These programs also cut first time drug use by half and violent acts by a third. Although faith based organizations cannot replace the government programs faith based organization over lap government programs by 75 percent which include medical aid, housing, help pay bills for heating and water and educational programs to help those get back on their feet to help better provide for their families (Koch, 2000). Poverty affects everyone not just the people living in poverty. The group that is most affected by poverty is the child. Without proper care and basic needs taken care of these children of poverty will become ill and some of these children die. These children have poor education and many do not stay in school to get there high school diploma. The children of poverty usually drop out of school to help provide for those that are in the home assisting their parents in paying the bills and providing food. These jobs are once again low paying jobs and the cycle continues. Without proper education the pattern will never end, with government assistance and faith based organizations to help these families and mentor their children will help for these children to get out of the poor status and has a chance to get off government assistance in the future. Everyone needs to be aware that although the United States is considered a wealthy country, there is poverty in the United States and the people need  to work together to break the cycle and make sure that the child are taken care of, so they can live a productive, healthy and happy life. References Duncan, G., Yeung, W., Brooks-Gunn, J., Smith, J. (1998). How much does childhood poverty affect the life chances of children? American Sociological Review, 63(3), 406-423. Retrieved April 4, 2010, from ABI/INFORM Complete. (Document ID: 30936057). Fantuzzo, J., Fusco, R., Mohr, W., Perry, M. (2007). Domestic Violence and Children’s Presence: A Population-based Study of Law Enforcement Surveillance of Domestic Violence. Journal of Family Violence, 22(6), 331-340. doi:10.1007/s10896-007-9080-4. Koch, K. (2000, April 7). Child poverty. CQ Researcher, 10, 281-304. Retrieved April 4, 2010, from CQ Researcher Online, http://library.cqpress.com/cqresearcher/cqresrre2000040700. Macionis, J.J. (2006) Society: The Basics Eighth Edition, Published by Prentice-Hall Poverty and Women in the United States. (2001). In Encyclopedia of Women and Gender: Sex Similarities and Differences and the Impact of Society on Gender. Retrieved from http://www.credoreference.com/entry/estwomen/poverty_and_women_in_the_united_stat es

What Do Children Owe Their Parents? Essay -- Sociology, Family, Parent

Every child who has been placed on this earth was made by the choice of their parents, who were given the opportunity to procreate. As children grow up and become adults, their parents become elderly and are unable to take care of themselves. Grown children don’t owe their parents anything, but to have a relationship of honoring their parents with love and respect. Parents are role models who are the important key elements in a child’s development. Your parents were there to give you life, to take care of you and to teach you what is right from wrong. â€Å"I will maintain that parents’ voluntary sacrifices, rather than creating â€Å"debts† to be repaid,† tend to create love or â€Å"friendship† (English 720). Depending how parents treat the child either in a negative or positive way, will determine how the Grown child will treat their elderly parents when they get older. â€Å"The duties of grown children are those of friends and result from love between them and their parents, rather than being things owed in repayment for parents’ earlier sacrifices (English 720). Your parents did you a favor in giving you life and putting you on this earth. This favor they did for you creates your debt. Not a debt to society, but to your parents. A debt is owing something or someone back from which you borrowed or used their services. A child does not owe their parents anything because they never asked to put in this world in Brotherson 2 the first place. As a child grows up to be an adult, they learn from their upbringing and have a chance to be better adults later on in life through introspection. Your parents made sacrifices to have you and to raise you. As an adult it should be a responsibility and a duty to take care of your parents. â€Å" What do grown... ...sed my graduation. prom, and birthdays. In my heart I am glad that she made me because she could’ve aborted me. After all of this I realize that my father was right about my mother. What I noticed is that her anger that is inside her everyday is mostly from my father and what she regrets is not being a mother to me. Today I don’t keep in any form of contact with her. I want her to decision to affect her for the rest of her life. I can’t be in her life if she doesn’t want me in her life. Brotherson 6 Through your parents mistakes you can be better parents in the future to your children. You can do this by being there for your child and making them be responsible adults in the future. Children owe it to themselves to build a life for themselves. Children owe it to themselves to find happiness in life and they owe it to themselves to make the right choices.

How is our current Economic growth compared to 30 years ago Essay

The year 1979 saw both external and internal conditions become difficult owing to rising inflation with end user prices increasing by 13%. The years 1979 to 1981 saw the US experience a double-digit price increase owing to global petroleum price increases, federal financial policies, plus the spending patterns of the government. The United States economic system started to take a descending trend. In order to manage such financial troubles, the administration of jimmy carter squeezed the national financial plans and implemented financial restraint (United nations, 2008). The administration as well declared short plus long-term energy regulations and attempted to control the financial climate. By mid 1900s, the US was a key end user of almost each significant industrial unprocessed material. Approximately 40 percent of the global total production of commodities was done in the US industries, even though American population was approximately 6 percent of the global total, with its total territory area being approximately 7 percent of total earth surface (Kubarych, 2002). United States production has gone on expanding recently, although at a more sluggish pace compared to other First World nations. THE United States by far surpasses each other country in the volume of her Gross national product (GNP) in unqualified terms. Unites states’ GNP experienced a growth rate of more than 300% ($3. 3 trillion) from 1970 to 1983. The year 1998 saw Americas Gross Domestic product (GDP) REACH $8. 5 trillion; per person GDP reached $31,500. 2002’s per person GDP mounted to $37,600, with national GDP amounting to $10. trillion. US Inflation in the 1990s was not significant as it was from the 1970s to 1980s. US rates are lower than those of many First World nations. From 1970 to 1978, for instance, end user prices rose by 6. 7 percent per annum (Sheikh, 1999). Following twenty years of financial prosperity, the US witnessed a financial decline in the 1970’s, an era famous for the unparalleled blend of stagnating economic progress plus inflation, which led to the development of the term stagflation. Overseas competitors within Europe and Japan confronted the world dominance of US manufacturers, whereas the 1973-1974 and 1979 petroleum crises eroded public trust in business and government institutions (Fisher, 2009). The mandatory Lockheed and Chrysler bailouts symbolized the tough changeover to a fresh economic period, characterized by the significance of the service segment and plus the growth of little business ventures. During the initial presidential tenure of Ronald Reagan, beginning in 1980 to 1984, America witnesses 2 harsh recession years succeeded by 2 strong recovery years. Inflation rates declined with many new job opportunities created. However, the early plus mid-eighties economic growth was accompanied by several shocking developments. National budget shortfalls, arising from spectacular military expenditure increases, and from increasing entitlement plan, for instance, Medicare and Medicaid, costs, averaged in excess of $150 billion per year. As at 1992, total shortfall amounted to $290 billion, in other words $1,150 per each American citizen (Marcy, 2008). Additionally, company debt increased spectacularly, and family borrowing increased twofold compared to personal revenue. The 1980s as well experienced banking crisis due to several factors including: problem lending to Third World nations; elevated interest and inflation rates; and speculative property market schemes that made many banks collapse when the early 1980s property market boom collapsed. The Ronald administration brought in Reaganomics in 1981, which were fiscally-expansive financial policies, thus reducing federal revenue levy rates by twenty five percent. Inflation reduced from 1980’s 13. 5 percent figure to a mere 3 percent in 1983 because of tougher control of interest rates and money supply by the Federal Reserve and a brief recession. Real GDP went on increasing and unemployment went on rising to peak at 10. 8 percent in 1982, and then fell to 5. 4 percent in 1989. The disparity between the wealthy and the poorest increased whereas the national debt tripled. In 1981 the national debt was $930 billion; it stood at $ 2. 6 trillion in 1988. The United States began to experience huge trade shortfalls (http://www. mofa. go. jp/POLICY/other/bluebook/1980/1980-1. htm). The beginning of deindustrialization from the late 60s to early 70s made income differentials rise to an all time high. However, consumers had a record ability to purchase quantities of commodities they never were able to purchase before. Due to the practice of US companies to outsource heavy engineering and manufacturing labor operations to less developed nations, income differentials rose dramatically. The US Gini coefficient in 2005 had increased from 1968’s 0. 386 to 0. 469. The difference between the wealthy and the impoverished grew larger by the close of the 1900s. The proportion of the national revenue appropriated by the wealthiest American household increased from 1977’s 18. % to 1990’s 24. 5%, whereas the proportion of the most poor dropped from 5. 7 percent to 4. 3 percent. Outside America’s trade circumstances worsened due to the development of a swelling trade shortfall by a combination of a passive American dollar and elevated foreign investment levels. The 1990s saw America plunge into an economic recession due to rising petroleum prices after Iraq invaded K uwait, reducing credit availability, and a steep interest rates rise (McConnell, Bruce, Flynn, 2006, 137). Output dropped by 1. 6 percent with 1. 7 million job opportunities being lost. Unemployment levels increased from 1989’s 5. 2 percent to 1991’s 7. 5 percent. As at 1998, unemployment rates had dropped to 4. 5% (Sheikh, 1999). The revival that commenced in 1991 launched a continuous expansion period, which boasted of being the 3rd largest, since the Second World War, in 2000. Actual GDP growth varied from 2 percent to 3. 5 percent; the figures for 1998 were 3. 9 percent. Following climaxing at 7. 5 percent, unemployment dropped progressively during the early and mid 1990s, dropping to 5. 6 percent by 1995, 5. 3 percent at the close of 1996, and remaining less than 5 percent in 1998. Inflation generally remained less than 3 percent past 1993/1994. The stock markets were exempted from being influenced by the restrained economic climate; they increased from 1995 to 1997 owing to reduced employment, strong company profits, and reduced inflation. Stock markets expansion had declined as at 1999/2000. The bipartisan balanced-financial plan, that was passed and ratified in 1997, was another reason for buoyancy. The scheme, merging spending and tax cuts over some 5-year duration, aimed to balance the national financial plan by the year 2002. The government, in 2001, predicted a $275 billion budget excess for the financial year ending 2001 September, a prediction that was soon reversed. At the dawn of the 21st century, substantial financial concerns, apart from the usual concern regarding how much longer the boom would last before ultimately collapsing, included America’s huge trade shortfall, the rising medical expenditures for aging citizens, plus the inability of the sturdy economic system to enhance the circumstances of the impoverished. Starting in 1975, household revenue gains were witnessed almost solely by the top 20 percent households. Nevertheless, towards the close of the 1990s plus early 21st century, productivity continued to expand, the job market was squeezed, and inflation remained comparatively low. Economic expansion halted by mid 2001, mainly owing to the conclusion of the extended asset boom, particularly within information technology sectors. The economic system suffered a recession towards the close of 2001, affecting the manufacturing and service sectors. The September 11th 2001 terrorist attacks on the US worsened the underperforming financial situation. 001 Mean real GDP growth increased by a mere 0. 3 percent. The economic system of the United states, which in the 1990s dictated worldwide economic progress, turned out to cause global financial decline in north America, Japan, Europe, southeast Asia, and Latin America. The economic system began a slow recovery in 2002; GDP growth estimates were 2. 45 percent. Scholars attributed such modest upturn to the capability of commerce think tanks to react t o financial inequities on the basis of real-time data, deregulation, plus creativity in product and financial markets. However, local confidence regarding the economic system continued to be low, and combined with key company failures, such as World Com and Enron, plus extra stock market limits, the upturn remained uneven and sluggish. Growth declined by the close of 2000, with unemployment rates rising to 6. 3 percent by July 2003. CPI rates of inflation dropped to below 1. 5 percent at the start of 2003. This raised anxieties regarding the possibility of deflation. There was also a significant increase in armed forces expenditure due to the 2003 Iraq war (http://resources. metapress. com/pdfpreview. xd? code=wr28t0l0n1187370&size=largest). After the Iraq war, consumer expenditure and stock values rebounded; housing market continued to be sturdy; inflation rates were low; extra tax reductions were enacted; the American dollar decreased in value on global markets; growth productivity was sturdy; and petroleum prices dropped (McConnell, Bruce, Flynn, 2006, 131). Due to such factors, numerous analysts forecasted a more positive financial situation come 2004. However, the national budget shortfall was predicted to amount to $455 billion in 2003, the biggest deficit ever recorded. The US economic climate was mainly shaped through private expenditure; the decline of private expenditure had a vital role in slowing down the gross national product growth rate. However, fixed ventures were as well already declining. Nevertheless, economic progress did not persistently decline in 1978; rather, it varied significantly from, one quarter to the next. Despite the fact that the rate of growth showed consistent patterns, the anticipated improvement regarding the US balance of payments was not realized. The year 1979 witnessed a sharp decline in car trade by America’s 3 main auto manufacturers, Ford, Chrysler, and General Motors. This led to the dismissal of about 100,000 employees in the automobile industry. By 2002, the US economy had a number of weaknesses and strengths. The strengths were witnessed in: the housing market; automobile sales; imports, military expenditure; and inflation. Weak segments were: the labor market; trade fixed investments; construction; bank loans; and profits. Regarding strong points, the housing sector witnessed sturdy price rises, averaging approximately 7 per year. Reduced interest rates allowed households to re-fund mortgages and dispense some gains on homes. Credit card and car loan access was as well simple. Such extra monetary resources support sturdy consumption expenditure. Regarding automobile sales, owing to sufficient liquidity, consumers could capitalize on low-cost funding incentives and price reductions to purchase automobiles at prodigious rates. However, automobile firms were unable to earn much due to the existence of a highly aggressive environment where pricing supremacy was non-existent (Yellen, 2008). Pertaining to imports, much consumption emerged in form of increased import levels and current account and trade deficits. In defense expenditure, the increase in armed forces hardware, particularly aviation spare parts and airplanes added approximately 0. 5 percent to GDP expansion. Inflation was mainly caused by petroleum and housing prices. In 2002, labor market growth was minimal and new layoffs diminished. Unemployment rate stood at 6 percent. Regarding trade fixed investments; there was tremendous surplus capacity within a number of ultra-modern industry sections, particularly telecommunications apparatus. Senior managers further tightened investment budgets. In the construction industry, the drop in non-housing property development was catastrophic. Local government and state infrastructure programs were downsized due to budgetary constraints. Regarding bank loans, standards were tightened and costs increased, particularly for borrowers with little creditworthiness. Loan demands dwindled. Regarding profits, numerous industries were not making any profits (http://www. nationsencyclopedia. com/Americas/United-States-ECONOMY. html). The US economy in 2008 shrunk at a 6. 3 percent yearly rate in the last quarter of 2008. Unemployment rates are increasing with about 13. million unemployed people, translating to an 8. 5 percent unemployment rate. This situation has worsened the home market problem. A recent Case-Shiller survey indicated that the decline in home prices increased in 20 surveyed city districts, declining nineteen percent per annum for the 3-month time period concluded in January 2009. Business owners have added to the problem by reducing expenses, especially the labor cost, and operating squeezed inventories, downsizing delivery lines, postponing all except the most compulsory capital spending, and generally evading risks in order to maintain business margins. The outcome is that the American economic system is static, with no new ventures and no gains (http://www. oecd. org/document/45/0,3343,en_2649_34573_38630765_1_1_1_1,00. html). The contraction of us overseas markets, that are essential to economic growth through the sale of high-value services and goods, is another negative development. The World Bank predicts that global economic systems will experience a 1. 7% decline in 2009, with international trade experiencing a 6. 1% decline. The Federal Reserve is taking radically proactive plus highly creative measures to reinstate credit market vibrancy and control financial decline. In about 1 year, the Federal Reserve has: set up a loan structure for main security merchants , adopting fresh types of guarantee for such loans; started exchange lines with 14 key trading partners , for example, Bank of Japan, European Central Bank, Bank of England, Banco de Mexico, Monetary Authority of Singapore, and Korean Central Bank , to offer such overseas central banks the capability to provide united states dollar financial support to organizations under their command ; developed facilities for backstopping financial market joint funds; started fresh mechanisms in conjunction with the Federal Deposit Insurance Corp. nd the Treasury to fortify particular banks’ security; carried out a key plan to buy business paper, which is a major element of the economic system; started to reimburse bank reserves interest; declared plans to purchase as much as $100 billion of Fannie Mae, Federal Home Loan, and Freddie Mac direct debts, and then pushed up the amount to $200 billion; declared plans to purchase $500 billion worth of the mortgage-backed securities supported by Freddie, Ginnie Mae, and Fannie, then pushed the amount to $1. 5 trillion; declared and recently implemented a novel facility for supporting the provision of asset-supported securities guaranteed by learner loans, credit card loans, car loans, plus loans collateralized by the Small Business Administration; and commenced the procedure of buying as much as $300 billion worth of long-term Treasury securities to assist enhance private credit markets conditions. In addition, the Federal Open Market Committee (FOMC) lowered the federal funds levels to 0-1/4 of 1 percent. At the same time, the FMOC reduced the rates charged on banks when they borrow from FMOC’s discount window in order to reduce the credit cost to the economic system. Therefore, the balance sheet of the federal reserve has expanded to about $2 trillion currently, which ids in excess of twice the increase witnessed since its inception in 2008.

The Disposition Effect And Critically Evaluate The Explanations Finance Essay - Free Essay Example

Sample details Pages: 9 Words: 2826 Downloads: 3 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Some investors are curious about whether there is a disposition effect in the real world. The matter has been settled, since there is obvious empirical evidence to support an occurrence of the disposition effect in the markets, including stock markets. However, underlying causes for it are still ambiguous. Some claim that the disposition effect could be explained by various theories, both traditional and behavioural theories. Another observer argues that the explanations cannot be captured and fully understood by those theories. To prove that the disposition effect occurs in the markets, Odean (1998) performed a test on 10,000 customer accounts provided by a nationwide discount brokerage house between 1987 and 1993. On each day of the study, each stock in customers portfolios was recorded and categorised into one of four positions when it was sold. These four stock positions are sold for gain, sold for loss, not sold and presenting a gain, and not sold and pres enting a loss, called realised gain, realised loss, paper gain, and paper loss, repectively. He then used the recorded numbers to calculate the two ratios, illustrated in figure 1. The result shows strong evidence for the existence of disposition effect, as the 14.8 percent PGR ratio exceeded the 9.8 percent PLR ratio for the entire year, and the ratio of PGR to PLR is approximately 1.5. This figure indicates that more than 50 percent of stocks that appreciate in value are more likely to be sold than stocks whose value has declined. The table of results from the test is shown in figure 2. The tendency to sell winners too early and hold losers too long was first official observed by Shefrin and Statman (1985). Understanding the disposition effect and why it occurs is helpful in understanding the trading behaviour of investors. Explanations of this tendency regularly mention prospect theory, which is one of the most widely accepted theories among decision making under risk and u ncertainty. This theory was pioneered by Kahneman and Tversky (1979), implying that investors usually perceive outcomes as gains or losses and the value is measured by deviations from the reference point. Investors initial purchase prices are supposed to be their reference points. The main feature is the S-shaped value function, which can be seen from figure 3. It displays a concave curve in the domain of gains and a convex curve in the domain of losses. A graph that is steeper for losses than for gains indicates loss aversion. This means that when investors experience gains, they tend to be more risk averse and vice versa when they experience losses. Thus, risk averters may tend to sell stock that appreciates in value, and tend to hold on to stock that declines in value. Considering the example from Shefrin and Statman (1985), an investor purchases a stock at 50 dollars and one month later the price drops to 40 dollars. The investor has two alternatives: selling the stock now to realise a 10 dollar loss, or hold on the stock for one more period. The latter will be selected over the former, as shown by the convex curve of the S-shaped value function. Consequently, the investor will hold on to the loser. Prospect theory generally plays an important role in explaining the disposition effect; hence, there are several researchers working on this article (see e.g. Weber and Camerer 1998; Barber and Odean 1999; and more recently Hens and Vlcek 2009). Barberis and Xiong (2009) were among those who studied two cases in order to determine whether the disposition effect can be predicted by prospect theory. The first case investigated prospect theory in relation to the annual profits of stock trading over a one-year period, and the other was related to the realised gains and losses when some stocks are sold. The first case used 10,000 investors with prospect preferences. Barberis and Xiong also note that they follow Odeans methodology to calculate PGR and PLR ra tios with various expected risky asset returns and trading periods. The result, however, shows that the model is unsuccessful in predicting the disposition effect when the expected return is high, and the number of trading periods is low. The investors tend to hold shares when the prices rise rather than drop, which is opposed to the disposition effect. Moving on to the second case, they perform the test regarding the optimal share holding with a specific expected return on three dates: at the date of purchase (X0), at the date of stocks doing well (Xu), and at the date of stocks doing poorly (Xd). The result is presented in figure 4. When the expected return is equal to 1.11, an investor buys 3.7 shares of a risky asset. If the stock performs well, he/she decreases the holding to 3 shares. On the other hand, if the stock performs poorly, he/she holds the same number of shares, 3.7 shares. This indicates that the disposition effect can be predicted by prospect theory only in r ealised gains and losses, not in paper gains and losses. Prospect theory, however, does not provide an obvious cause of this effect due to the lack of behavioural considerations. For this reason, alternative behavioural theories such as cognitive psychology and specific emotions were introduced. In Shefrin and Statman (1985)s framework, they present a concept of mental accounting or narrow framing that was first introduced by Richard H. Thaler. According to Thaler (1984, cited in Shefrin and Statman, 1985, p. 780), investors are inclined to organise different type of gambles faced into separate accounts in their minds. For example, when an investor buys stocks, he/she establishes new mental accounts for each stock in his/her mind. The investor then uses prospect theory to make a decision on each account. In other words, an investor pays attention to single a stock instead of the whole portfolio. This way of thinking might lead to the disposition effect. Considering that the in vestor faces a paper loss he/she sells off the stock to realise that loss. The mental account is now closed and the investor is pained as the paper loss becomes a certain loss. However, it is difficult to close mental accounts at losses, since that action proves that the investor made a wrong decision in buying the stocks. Hens and Vlcek (2009) also provide an alternative explanation using two mental accounts: realised gains and losses, and paper gains and losses. The paper account has less weight than the realised account. An investor who experiences paper losses is less pained than one who experiences realised losses, and realised gains provide greater happiness than paper gains. That is why investors keep the losers and sell the winners. What concerns an investor is not only an outcome of a decision, but also the feeling about that outcome. To be more obvious, regret theory could be used to explain the disposition effect. When the level of wealth would have been higher with an alternative decision that the investor did not make in the first place, he/she feels regret. As for pride, when the decision the investor made turns out to be better than an alternative decision, he/she feels pride. (Muermann and Volkman, 2006) Shefrin and Statman state that an investor feels regret when a stock account is closed at a loss and feels pride when a stock account is closed at a gain. The circumstance of seeking pride and avoiding regret can lead to the disposition effect. In Summer and Duxbury (2012), the balance of emotions resulting from decision making was investigated. They claim that in the specific decision, experiencing the balance of positive and negative emotions can predict the disposition effect. For instance, when an investor purchases and holds a stock, he/she has to make a decision to hold it or sell it at the end of the first period. The future outcome is uncertain; both currently winning and losing stock can be winning or losing stock in the futur e. This can create both positive and negative emotions. If an individual owns a loser and sells it to realise a loss, he/she feels regret about buying this stock. To hold on to this loser might be the optimal choice, as it offers a path to avoid negative emotion, namely regret. Summer and Duxbury note that Thus behavior predicted for regret is consistent with the behavior observed for losers in the disposition effect (continue to hold in an attempt to put things right) (p. 4). What if an individual owns a winner? Sell the winner creates rejoicing, since a paper gain is turned into a realised gain. The emotions that individuals feel vary depending on the responsibility for outcomes or whether they own stocks. They feel elation or disappointment due to the non-responsibility. An individual, who owns stocks, will also feel joy and regret. Another psychological examination of emotions is Muermann and Volkmans paper, which introduced the model to measure the amount of regret and pr ide for investors. An individual focuses only on the realised return of stocks he/she holds, and feels regret or pride for all decisions he/she made. They conclude that the disposition effect can be explained by individuals feelings of regret and pride. The reason that investors decide to sell winners and ride losers might not be that they are reluctant to realise losses or avoid regret, but that they believe in price mean reversion. According to Odean (1998), investors hope the losing stocks will outperform currently winning stocks in the future. They might sell winners, as they believe the prices are now reflected in their information. Conversely, they decide to hold losers because they believe the prices have not been reflected in their information yet. The test was carried out by calculating the excess return after selling winners and the paper loss on riding losers. This belief is, however, regularly inaccurate, since the excess return for the sale of winning is higher than paper losses. This point of view is also supported by Hens and Vlcek (2009). Such irrational belief that losers will outperform winners and todays winners will be losers in the future could lead to the disposition effect. In behavioural explanations, self-control is an essential part to make investors overcome a reluctance to realise their losses. In Thaler and Shefrin (1981)s framework, an individual is considered as an organisation, which has a conflict between a planner and a doer, called the planner-doer model. The planner has lifetime utility and it is a rational part. The doer, in contrast, relates to only one period of time and it is an emotional part; therefore, it is assumed to hold power to influence individuals actions. Selling winners quickly to feel pride and continuing to hold losers to defer regret thus comes from the doer part. The planner might not be powerful enough to stop this action of the doer. The disposition effect then occurs. Alternatively, tax consid erations and portfolio rebalancing are investigated to find whether they can be used to explain the disposition effect. Lakonishok and Smidt (1986) studied the turnover of stocks related to taxation. They find that losers have lower turnover than winners. Moreover, the wash-sale rule, which prevents investors from repurchasing the same stocks at least 30 days after selling, is also a good explanation. Investors have a tradeoff between realising tax benefits and not trying to decrease equity exposure. However, this rule does not explain why investors realise gains. (Shefrin and Statman 1985) When investors are faced with a major price movement of a stock in an upward direction, they may sell a part of that stock in order to rebalance their portfolios. Odean (1998), therefore, performs the test by excluding the traders who desire to restructure portfolios and tax considerations, and then calculates PGR and PLR again. The result, however, still exhibits the disposition effect. Odean co ncludes that tax considerations and portfolio rebalancing do not cause the disposition effect. All of the previously mentioned explanations appearing in various publications are possible causes of the disposition effect. Since they do not fully explain the disposition effect or do not have enough explanatory power in some authors viewpoints, a number of studies are proposed to contradict these explanations. Hens and Vlcek (2009) argue that prospect theory cannot explain the disposition effect, as this theory considers ex-post disposition behaviour, not ex-ante. They study individuals risk-taking behaviours according to an increase and decrease in stock prices. The ex-ante disposition occurs over two periods of time, whereas the ex-post disposition involves only one period. The behaviour in the second period relates to the movement of stock prices in the first period. The investors are inclined to ex-post disposition behaviour more than ex-ante disposition. This is because Thos e investors who sell winning stocks too early and keep losing stocks too long would not have invested in stocks in the first place.(p. 5). In Zuchel (2001)s paper, it is also claimed that prospect theory involves a one-period decision making. It does not go along with the disposition effect, which account for sequential decision making. The explanation that the degree of risk aversion falls after losses and rises after gains seems to not have its origins in the prospect theory. Consequently, the disposition effect cannot be explained by the S-shaped value function. Furthermore, Weber and Camerer (1998) introduced the opposite view of the mean reversion. The disposition effect exists only if winners would fall and losers would rise. According to their framework, the belief in mean reversion is wrong. This is because stocks increasing in value are more likely to indicate a positive trend and further rise. This is similar to losers, which are inclined to fall. The explanatory pow er of regret theory is limited. This is to say, it cannot apply to every situations. For example, it cannot apply to a situation that has more than two alternatives. Zuchels framework testing regret theory to find the connection between a current decision and a past price found no such connection, which should exist with the disposition effect. Again in relation to tax considerations, the turnover of selling losers seems to be higher than normal in December and exhibits a smaller disposition effect due to tax benefits. Taxes are generally calculated on a tax-year basis, thus December is the last chance for investors to realise their losses and receive the tax benefits. (Lakonishok and Smidt 1986) Barber and Odean (1998) also support this point of view. As for the self-control issue, the main problem is that investors do not have enough self-control to end their investments at losses. However, various techniques can be used to control investors doers. One of the techniques that some professional traders adopt is iron-clad rules. These rules are used to compel traders to realise losses when they reache a predetermined level. For example, traders will sell stocks when losses stretch to ten percent of the purchase prices. The findings of Dhar and Zhu (2002) confirm that the disposition effect, on average, exists among individual investors. Despite this, they discover that approximately twenty percent of their sample investors present the reverse disposition effect. They summarise that the size of the disposition effect can be affected by investor characteristics and sophistication. The wealthier, more professional, more experienced or more frequently trading investors tend to exhibit a smaller disposition effect. Although the disposition effect among individuals exists, there is no strong evidence that it occurs among mutual funds and foreign investors. In Taiwan Stock Exchange (TSE), Barber, Lee, Liu and Odean (2007) find that investors are more likely t o realise gains than losses. They, however, do not find the disposition effect in mutual funds and foreign investors. Jin and Scherbina (2011) also note that US equity mutual funds, on average, tend to realise capital losses rather than capital gains because the new managers are more likely to sell off losers from their portfolios. Since mutual funds have more experience obtained from continuous trading in the markets, this makes them more skilled and they can keep away from disposition effect behaviour. In the financial market, investors do not always act rationally. An investor who sells winners to realise gains and holds losers to defer losses exhibits the disposition effect. The persistence of this effect in trading patterns in the financial markets is confirmed by many researchers such as Odean (1998). This paper is, hence, concerned with the review of the disposition effect and the evaluation of its explanations. It documents the possible underlying factors studied by a num ber of researchers. Those factors, explored in the traditional theory and behavioural theories, could be used to explain why the disposition effect exists. The traditional theory is prospect theory which is the widely accepted model in financial studies. Since the disposition effect is not fully explained by this theory, the behavioural theories, which are mental accounting, regret aversion, self-control and mean reversion, were introduced. Alternatively, tax considerations and portfolio rebalancing are tested to determine whether they are the causes of the disposition effect. However, they are not the underlying causes. Furthermore, some empirical studies and frameworks disagree and argue that the disposition effect cannot be explained by the previously mentioned theories. Therefore, there is still a lack of full understanding of the underlying causes of the disposition effect. Don’t waste time! Our writers will create an original "The Disposition Effect And Critically Evaluate The Explanations Finance Essay" essay for you Create order