An Individual Level Analysis of the Disposition Effect: Empirical and Experimental Evidence
AbstractThe disposition effect describes investors’ common tendency of quitting a winning investment too soon and holding on to losing investments too long (Shefrin and Statman 1985). Our paper analyses individual level disposition effects using both account level field data as well as a controlled laboratory experiment. While we observe the disposition effect on aggregate, the extent to which a single decision maker is affected varies considerably across investors. We find overwhelming evidence for relative stability of individual disposition effects both within and across tasks, as well as across time. Learning, nevertheless, attenuates the magnitude of the effect strongly both within tasks and over time. In accordance with prior research, we also document that frequent traders sell their winners less and their losers more often, resulting in lower disposition effects.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 07-45.
Length: 0 pages
Date of creation: 27 Jun 2007
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Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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- Frino, Alex & Johnstone, David & Zheng, Hui, 2004. "The propensity for local traders in futures markets to ride losses: Evidence of irrational or rational behavior?," Journal of Banking & Finance, Elsevier, vol. 28(2), pages 353-372, February.
- Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
- Weber, Martin & Camerer, Colin F., 1998. "The disposition effect in securities trading: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 167-184, January.
- Philip Brown & Nick Chappel & Ray Da Silva Rosa & Terry Walter, 2006. "The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes-super-," International Review of Finance, International Review of Finance Ltd., vol. 6(1-2), pages 43-78.
- Glaser, Markus & Weber, Martin, 2009. "Which past returns affect trading volume?," Journal of Financial Markets, Elsevier, vol. 12(1), pages 1-31, February.
- Glaser, Markus & Weber, Martin, 2007. "Why inexperienced investors do not learn: They do not know their past portfolio performance," Finance Research Letters, Elsevier, vol. 4(4), pages 203-216, December.
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