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Up Close and Personal: An Individual Level Analysis of the Disposition Effect

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Author Info

  • Ravi Dhar
  • Ning Zhu
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    Abstract

    In this paper, we analyze the trading records of a major discount brokerage house to investigate the disposition effect, the tendency to sell winners too quickly than losers. In contrast to previous research that has demonstrated the disposition effect by aggregating across investors (Odean, 1998), our main objective is to identify individual differences in the disposition bias and explain this in terms of underlying investor characteristics. Building on the findings in experimental economics and self-correction in psychology, we hypothesize that investors' sophistication about financial markets and trading experience is responsible in part for the variation in individual disposition effect. Using demographic and socio-economic data as proxies for investors' sophistication, we find empirical evidence that wealthier and individual investors in professional occupations exhibit less disposition effect. Consistent with experimental economics, trading experience 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.

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    File URL: http://icfpub.som.yale.edu/publications/2562
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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm269.

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    Date of creation: 01 Mar 2002
    Date of revision: 01 Sep 2009
    Handle: RePEc:ysm:somwrk:ysm269

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    Web page: http://icf.som.yale.edu/
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    Related research

    Keywords: Disposition Effect; Investor Sophistication; Individual Decision Making;

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    Cited by:
    1. Gina Nicolosi & Liang Peng, 2004. "Do individual investors learn from their trading experience," Econometric Society 2004 North American Summer Meetings 532, Econometric Society.
    2. William N. Goetzmann & Massimo Massa, 2004. "Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias," Yale School of Management Working Papers ysm331, Yale School of Management.
    3. Scott Weisbenner & Zoran Ivkovich, 2003. "Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments," NBER Working Papers 9685, National Bureau of Economic Research, Inc.
    4. Ingmar Nolte & Valeri Voev, 2007. "Panel Intensity Models with Latent Factors: An Application to the Trading Dynamics on the Foreign Exchange MarketĀ¤," CoFE Discussion Paper 07-02, Center of Finance and Econometrics, University of Konstanz.

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