IDEAS home Printed from https://ideas.repec.org/a/eee/beexfi/v24y2019ics2214635018302697.html
   My bibliography  Save this article

The disposition effect and the relevance of the reference period: Evidence among sophisticated investors

Author

Listed:
  • Sarmiento, Julio
  • Rendón, Jairo
  • Sandoval, Juan S.
  • Cayon, Edgardo

Abstract

The Disposition Effect (DE) describes the disposition of selling winners too early and of keeping losers for too long. Conventionally the DE is measure using trades and the average purchase price. Being more rigorous with its measure, we found that US institutional and mutual fund present some evidence of DE when we used trades as the unit of measurement for both type of agents, but if we used dollars value as the unit of measurement, the DE vanishes as the time window becomes more distant. This reflects that the DE is a short term phenomenon that requires to consider how the reference periods are form but also which unit of measure are used. Considering this, we found that the market participants with the highest DE tend, on average, to be those with lower cumulative return, have smallest value portfolios, last the least, and have the highest coefficient of variation.

Suggested Citation

  • Sarmiento, Julio & Rendón, Jairo & Sandoval, Juan S. & Cayon, Edgardo, 2019. "The disposition effect and the relevance of the reference period: Evidence among sophisticated investors," Journal of Behavioral and Experimental Finance, Elsevier, vol. 24(C).
    • Handle: RePEc:eee:beexfi:v:24:y:2019:i:c:s2214635018302697
    DOI: 10.1016/j.jbef.2019.04.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S2214635018302697
    Download Restriction: no
    File URL: https://libkey.io/10.1016/j.jbef.2019.04.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 301-348.
    2. Cici, Gjergji, 2012. "The Prevalence of the Disposition Effect in Mutual Funds’ Trades," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(4), pages 795-820, August.
    3. Massimo Massa & William Goetzmann, 2003. "Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias," Yale School of Management Working Papers ysm333, Yale School of Management, revised 01 Apr 2005.
    4. Joshua D. Coval & Tyler Shumway, 2005. "Do Behavioral Biases Affect Prices?," Journal of Finance, American Finance Association, vol. 60(1), pages 1-34, February.
    5. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    6. Lei Feng & Mark Seasholes, 2005. "Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?," Review of Finance, Springer, vol. 9(3), pages 305-351, September.
    7. Kaustia, Markku, 2010. "Prospect Theory and the Disposition Effect," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(3), pages 791-812, June.
    8. Philip Brown & Nick Chappel & Ray Da Silva Rosa & Terry Walter, 2006. "The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes," International Review of Finance, International Review of Finance Ltd., vol. 6(1‐2), pages 43-78, March.
    9. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    10. Andrea Frazzini, 2006. "The Disposition Effect and Underreaction to News," Journal of Finance, American Finance Association, vol. 61(4), pages 2017-2046, August.
    11. Shapira, Zur & Venezia, Itzhak, 2001. "Patterns of behavior of professionally managed and independent investors," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1573-1587, August.
    12. Mark Grinblatt & Matti Keloharju, 2001. "What Makes Investors Trade?," Journal of Finance, American Finance Association, vol. 56(2), pages 589-616, April.
    13. Bing NMI1 Han & Mark Grinblatt, 2001. "The Disposition Effect and Momentum," Yale School of Management Working Papers ysm239, Yale School of Management.
    14. Grinblatt, Mark & Han, Bing, 2005. "Prospect theory, mental accounting, and momentum," Journal of Financial Economics, Elsevier, vol. 78(2), pages 311-339, November.
    15. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    16. Kliger, Doron & Kudryavtsev, Andrey, 2008. "Reference point formation by market investors," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1782-1794, September.
    17. Lei Feng & Mark S. Seasholes, 2005. "Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?," Review of Finance, European Finance Association, vol. 9(3), pages 305-351.
    18. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    19. 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.
    20. Constantinides, George M., 1984. "Optimal stock trading with personal taxes : Implications for prices and the abnormal January returns," Journal of Financial Economics, Elsevier, vol. 13(1), pages 65-89, March.
    21. Nicholas Barberis & Wei Xiong, 2009. "What Drives the Disposition Effect? An Analysis of a Long‐Standing Preference‐Based Explanation," Journal of Finance, American Finance Association, vol. 64(2), pages 751-784, April.
    22. O’Connell, Paul G. J. & Teo, Melvyn, 2009. "Institutional Investors, Past Performance, and Dynamic Loss Aversion," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(1), pages 155-188, February.
    23. Locke, Peter R. & Mann, Steven C., 2005. "Professional trader discipline and trade disposition," Journal of Financial Economics, Elsevier, vol. 76(2), pages 401-444, May.
    24. Manuel Ammann & Alexander Ising & Stephan Kessler, 2012. "Disposition effect and mutual fund performance," Applied Financial Economics, Taylor & Francis Journals, vol. 22(1), pages 1-19, January.
    25. Barber, Brad M. & Odean, Terrance, 2013. "The Behavior of Individual Investors," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1533-1570, Elsevier.
    26. Youki Kohsaka & Grzegorz Mardyla & Shinji Takenaka & Yoshiro Tsutsui, 2017. "Disposition Effect and Diminishing Sensitivity: An Analysis Based on a Simulated Experimental Stock Market," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 18(2), pages 189-201, April.
    27. Alex Imas, 2016. "The Realization Effect: Risk-Taking after Realized versus Paper Losses," American Economic Review, American Economic Association, vol. 106(8), pages 2086-2109, August.
    28. Brad M. Barber & Yi‐Tsung Lee & Yu‐Jane Liu & Terrance Odean, 2007. "Is the Aggregate Investor Reluctant to Realise Losses? Evidence from Taiwan," European Financial Management, European Financial Management Association, vol. 13(3), pages 423-447, June.
    29. Hyuk Choe & Yunsung Eom, 2009. "The disposition effect and investment performance in the futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(6), pages 496-522, June.
    30. Li, Yan & Yang, Liyan, 2013. "Prospect theory, the disposition effect, and asset prices," Journal of Financial Economics, Elsevier, vol. 107(3), pages 715-739.
    31. Massimo Massa, 2003. "Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias," Yale School of Management Working Papers ysm31, Yale School of Management.
    32. Barber, Brad M. & Odean, Terrance, 2004. "Are individual investors tax savvy? Evidence from retail and discount brokerage accounts," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 419-442, January.
    33. Uri Gneezy, 2005. "Updating the Reference Level: Experimental Evidence," Springer Books, in: Rami Zwick & Amnon Rapoport (ed.), Experimental Business Research, chapter 0, pages 263-284, Springer.
    34. Alok Kumar & Sonya Seongyeon Lim, 2008. "How Do Decision Frames Influence the Stock Investment Choices of Individual Investors?," Management Science, INFORMS, vol. 54(6), pages 1052-1064, June.
    35. Frydman, Cary & Rangel, Antonio, 2014. "Debiasing the disposition effect by reducing the saliency of information about a stock's purchase price," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 541-552.
    36. Ravi Dhar & Ning Zhu, 2006. "Up Close and Personal: Investor Sophistication and the Disposition Effect," Management Science, INFORMS, vol. 52(5), pages 726-740, May.
    37. Shefrin, Hersh & Statman, Meir, 1985. "The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-790, July.
    38. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    39. Badrinath, S G & Lewellen, Wilbur G, 1991. "Evidence on Tax-Motivated Securities Trading Behavior," Journal of Finance, American Finance Association, vol. 46(1), pages 369-382, March.
    40. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
    41. Kaustia, Markku, 2004. "Market-wide impact of the disposition effect: evidence from IPO trading volume," Journal of Financial Markets, Elsevier, vol. 7(2), pages 207-235, February.
    42. Kumar, Alok, 2009. "Hard-to-Value Stocks, Behavioral Biases, and Informed Trading," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(6), pages 1375-1401, December.
    43. Oehler, Andreas & Heilmann, Klaus & Lager, Volker & Oberlander, Michael, 2003. "Coexistence of disposition investors and momentum traders in stock markets: experimental evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(5), pages 503-524, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Talpsepp, Tõnn & Vaarmets, Tarvo, 2019. "The disposition effect, performance, stop loss orders and education," Journal of Behavioral and Experimental Finance, Elsevier, vol. 24(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Barber, Brad M. & Odean, Terrance, 2013. "The Behavior of Individual Investors," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1533-1570, Elsevier.
    2. Bernard, Sabine & Loos, Benjamin & Weber, Martin, 2021. "The disposition effect in boom and bust markets," SAFE Working Paper Series 305, Leibniz Institute for Financial Research SAFE.
    3. Marco Pleßner, 2017. "The disposition effect: a survey," Management Review Quarterly, Springer, vol. 67(1), pages 1-30, February.
    4. Choi, Darwin, 2019. "Disposition sales and stock market liquidity," Journal of Financial Markets, Elsevier, vol. 45(C), pages 19-36.
    5. Deaves, Richard & Kluger, Brian & Miele, Jennifer, 2018. "An exploratory experimental analysis of path-dependent investment behaviors," Journal of Economic Psychology, Elsevier, vol. 67(C), pages 47-65.
    6. Kliger, Doron & Kudryavtsev, Andrey, 2008. "Reference point formation by market investors," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1782-1794, September.
    7. Brettschneider, Julia & Burro, Giovanni & Henderson, Vicky, 2021. "Wide framing disposition effect: An empirical study," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 330-347.
    8. Jakusch, Sven Thorsten & Meyer, Steffen & Hackethal, Andreas, 2019. "Taming models of prospect theory in the wild? Estimation of Vlcek and Hens (2011)," SAFE Working Paper Series 146, Leibniz Institute for Financial Research SAFE, revised 2019.
    9. Li, Yan & Yang, Liyan, 2013. "Prospect theory, the disposition effect, and asset prices," Journal of Financial Economics, Elsevier, vol. 107(3), pages 715-739.
    10. Hincapié-Salazar, Juliana & Agudelo, Diego A., 2020. "Is the disposition effect in bonds as strong as in stocks? Evidence from an emerging market," Global Finance Journal, Elsevier, vol. 46(C).
    11. Gutiérrez-Nieto, Begoña & Ortiz, Cristina & Vicente, Luis, 2023. "A bibliometric analysis of the disposition effect: Origins and future research avenues," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    12. Karolis Liaudinskas, 2022. "Human vs. Machine: Disposition Effect among Algorithmic and Human Day Traders," Working Paper 2022/6, Norges Bank.
    13. Daniela Vesselinova Balkanska, 2018. "Disposition effect and analyst forecast dispersion," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 837-859, April.
    14. Ben-David, Itzhak & Hirshleifer, David, 2011. "Beyond the Disposition Effect: Do Investors Really Like Gains More Than Losses?," Working Paper Series 2011-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    15. Maier, Johannes K. & Fischer, Dominik S., 2021. "Decomposing the Disposition Effect," Rationality and Competition Discussion Paper Series 288, CRC TRR 190 Rationality and Competition.
    16. Dierick, Nicolas & Heyman, Dries & Inghelbrecht, Koen & Stieperaere, Hannes, 2019. "Financial attention and the disposition effect," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 190-217.
    17. An, Li & Argyle, Bronson, 2021. "Overselling winners and losers: How mutual fund managers' trading behavior affects asset prices," Journal of Financial Markets, Elsevier, vol. 55(C).
    18. Andreu, Laura & Ortiz, Cristina & Sarto, José Luis, 2020. "Disposition effect in fund managers. Fund and stock-specific factors and the upshot for investors," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 253-268.
    19. Jakusch, Sven Thorsten, 2017. "On the applicability of maximum likelihood methods: From experimental to financial data," SAFE Working Paper Series 148, Leibniz Institute for Financial Research SAFE, revised 2017.
    20. Kahya, Evrim Hilal & Ekinci, Cumhur, 2022. "Disposition bias among Borsa Istanbul investors: What do we know about type, size and trading frequency?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).

    More about this item

    Keywords

    Disposition effect; Mutual funds; Institutions; Investment decisions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G4 - Financial Economics - - Behavioral Finance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:beexfi:v:24:y:2019:i:c:s2214635018302697. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-behavioral-and-experimental-finance .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.