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Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?

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Author Info
Lei Feng
Mark S. Seasholes
Abstract

This paper provides an in depth analysis of an investor's reluctance to realize losses and his propensity to realize gains - a behavior known as the disposition effect. Together, sophistication (static differences across investors) and trading experience (evolving behavior of a single investor) eliminate the reluctance to realize losses. However, an asymmetry exists as sophistication and trading experience reduce the propensity to realize gains by 37% (but fail to eliminate this part of the behavior.) Our research design allows us to follow an individual's behavior from the start of his investing life&career. This ability makes it possible to track the evolution of the disposition effect as it is reduced and&or disappears.Our results are robust to alternative explanations including feedback trading, calendar effects, and frequency of observation. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1007/s10679-005-2262-0
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Publisher Info
Article provided by Oxford University Press for European Finance Association in its journal Review of Finance.

Volume (Year): 9 (2005)
Issue (Month): 3 ()
Pages: 305-351
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Handle: RePEc:oup:revfin:v:9:y:2005:i:3:p:305-351

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  1. Andreas Hackethal & Michael Haliassos & Tullio Jappelli, 2009. "Financial Advisors: A Case of Babysitters?," CFS Working Paper Series 2009/04, Center for Financial Studies. [Downloadable!]
    Other versions:
  2. Gloede, Oliver & Menkhoff, Lukas, 2009. "Financial professionals' overconfidence: Is it experience, job, or attitude?," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-428, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  3. Chiang, Yao-Min & Hirshleifer, David & Qian, Yiming & Sherman, Ann, 2009. "Learning to Fail? Evidence from Frequent IPO Investors," MPRA Paper 16854, University Library of Munich, Germany, revised Aug 2009. [Downloadable!]
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