Advanced Search
MyIDEAS: Login

Up Close and Personal: Investor Sophistication and the Disposition Effect

Contents:

Author Info

  • Ravi Dhar

    ()
    (Yale School of Management, Yale University, New Haven, Connecticut 06520)

  • Ning Zhu

    ()
    (Graduate School of Management, University of California, Davis, California 95616)

Registered author(s):

    Abstract

    This paper analyzes the trading records of a major discount brokerage house to investigate the disposition effect, the tendency to sell stocks that have appreciated in price (winners) sooner than stocks that trade below the purchase price (losers). In contrast to previous research that has demonstrated the disposition effect by aggregating across investors, our main objective is to identify differences in the disposition bias across individuals and explain this in terms of underlying investor characteristics. Building on the findings in experimental economics and social psychology, we hypothesize that differences in investor literacy about financial markets and trading frequency are responsible in part for the variation in individual disposition effect. Using demographic and socioeconomic variables as proxies for investor literacy, we find empirical evidence that wealthier individuals and individuals employed in professional occupations exhibit a lower disposition effect. Consistent with experimental economics, trading frequency also tends to reduce the disposition effect. We provide guidelines for investment advisors, regulators, and investment communities to utilize our findings and help investors make better decisions.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://dx.doi.org/10.1287/mnsc.1040.0473
    Download Restriction: no

    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 52 (2006)
    Issue (Month): 5 (May)
    Pages: 726-740

    as in new window
    Handle: RePEc:inm:ormnsc:v:52:y:2006:i:5:p:726-740

    Contact details of provider:
    Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Email:
    Web page: http://www.informs.org/
    More information through EDIRC

    Related research

    Keywords: disposition effect; investor sophistication; individual decision making;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:52:y:2006:i:5:p:726-740. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.