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Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?

Listed author(s):
  • Lei Feng
  • Mark Seasholes
Registered author(s):

    This paper provides an in depth analysis of an investor’s reluctance to realize losses and his propensity to realize gains – a behavior known as the disposition effect. Together, sophistication (static differences across investors) and trading experience (evolving behavior of a single investor) eliminate the reluctance to realize losses. However, an asymmetry exists as sophistication and trading experience reduce the propensity to realize gains by 37% (but fail to eliminate this part of the behavior.) Our research design allows us to follow an individual’s behavior from the start of his investing life/career. This ability makes it possible to track the evolution of the disposition effect as it is reduced and/or disappears. Our results are robust to alternative explanations including feedback trading, calendar effects, and frequency of observation. Copyright Springer 2005

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    Article provided by Springer in its journal Review of Finance.

    Volume (Year): 9 (2005)
    Issue (Month): 3 (09)
    Pages: 305-351

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    Handle: RePEc:kap:eurfin:v:9:y:2005:i:3:p:305-351
    DOI: 10.1007/s10679-005-2262-0
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