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The disposition effect among mutual fund participants: a re-examination

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  • Paulo Pereira da Silva
  • Victor Mendes
  • Margarida Abreu

Abstract

Based on the information gathered on mutual fund trades executed between 1998 and 2017 by 31,513 individual investor clients of a major Portuguese bank, we study the relationship between the disposition effect, financial literacy and trading experience. We find that mutual fund investors exhibit a strong disposition effect. The tendency to hold losers is partially offset with literacy: a university degree reduces the propensity to hold on to loser funds, in addition to greater financial knowledge and stronger math skills. Literacy also plays a role in shaping the way experience affects this bias. Evidence of the disposition effect remains after considering redemption fees, bad emotions, irrational beliefs, market sentiment and the existence of someone to blame. Given that the existence of the disposition effect entails substantial costs for investors, higher levels of literacy benefit investors. The implementation of measures that accommodate investor reaction to poor performances may also help to reduce the disposition effect.

Suggested Citation

  • Paulo Pereira da Silva & Victor Mendes & Margarida Abreu, 2022. "The disposition effect among mutual fund participants: a re-examination," The European Journal of Finance, Taylor & Francis Journals, vol. 28(12), pages 1237-1256, August.
    • Handle: RePEc:taf:eurjfi:v:28:y:2022:i:12:p:1237-1256
    DOI: 10.1080/1351847X.2021.1998176
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

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