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


  • Lei Feng
  • Mark S. Seasholes


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.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:revfin:v:9:y:2005:i:3:p:305-351.

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