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Rational disposition effects: Theory and evidence

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  • Dorn, Daniel
  • Strobl, Günter

Abstract

The disposition effect is a longstanding puzzle in financial economics. This paper demonstrates that it is not intrinsically at odds with rational behavior. In a rational expectations model with asymmetrically informed investors, trading strategies as predicted by the disposition effect can arise as an optimal response to dynamic changes in the information structure. The model predicts that the disposition behavior of uninformed investors weakens after events that reduce information asymmetries. The data, trading records of 50,000 clients at a German discount brokerage firm from 1995 to 2000, are consistent with this prediction.

Suggested Citation

  • Dorn, Daniel & Strobl, Günter, 2023. "Rational disposition effects: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:jbfina:v:153:y:2023:i:c:s0378426623000821
    DOI: 10.1016/j.jbankfin.2023.106858
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    More about this item

    Keywords

    Disposition effect; Behavioral finance; Time-varying information asymmetry;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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