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Selling winners, buying losers: Mental decision rules of individual investors on their holdings

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  • Cristiana Cerqueira Leal
  • Gilberto Loureiro
  • Manuel J. Rocha Armada

Abstract

We extend the study of the disposition effect − the preference for selling (holding) current winning (losing) stocks − by adding a new element to this decision process: the investors’ preference to purchase additional units of the current losing stocks. Using a unique database, we find that individual investors prefer to sell their winning stocks and, simultaneously, hold and increase their exposure to the losing ones. The additional purchase is pervasive across investors, but stronger for less sophisticated investors. Our evidence suggests that reference prices, prior stock returns, stock visibility, and investor performance and sophistication are determinants of investors’ trading behavior.

Suggested Citation

  • Cristiana Cerqueira Leal & Gilberto Loureiro & Manuel J. Rocha Armada, 2018. "Selling winners, buying losers: Mental decision rules of individual investors on their holdings," European Financial Management, European Financial Management Association, vol. 24(3), pages 362-386, June.
  • Handle: RePEc:bla:eufman:v:24:y:2018:i:3:p:362-386
    DOI: 10.1111/eufm.12145
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    References listed on IDEAS

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