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Stock market investors' use of stop losses and the disposition effect

Author

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  • Daniel W. Richards
  • Janette Rutterford
  • Devendra Kodwani
  • Mark Fenton-O'Creevy

Abstract

The disposition effect is an investment bias where investors hold stocks at a loss longer than stocks at a gain. This bias is associated with poorer investment performance and exhibited to a greater extent by investors with less experience and less sophistication. A method of managing susceptibility to the bias is through use of stop losses. Using the trading records of UK stock market individual investors from 2006 to 2009, this paper shows that stop losses used as part of investment decisions are an effective tool for inoculating against the disposition effect. We also show that investors who use stop losses have less experience and that, when not using stop losses, these investors are more reluctant to realise losses than other investors.

Suggested Citation

  • Daniel W. Richards & Janette Rutterford & Devendra Kodwani & Mark Fenton-O'Creevy, 2017. "Stock market investors' use of stop losses and the disposition effect," The European Journal of Finance, Taylor & Francis Journals, vol. 23(2), pages 130-152, January.
  • Handle: RePEc:taf:eurjfi:v:23:y:2017:i:2:p:130-152
    DOI: 10.1080/1351847X.2015.1048375
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    References listed on IDEAS

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    1. repec:eee:jeborg:v:154:y:2018:i:c:p:175-190 is not listed on IDEAS
    2. repec:eee:glofin:v:35:y:2018:i:c:p:1-11 is not listed on IDEAS
    3. repec:eee:joepsy:v:66:y:2018:i:c:p:79-92 is not listed on IDEAS
    4. Li, Jianbiao & Niu, Xiaofei & Li, Dahui & Cao, Qian, 2018. "Using Non-Invasive Brain Stimulation to Test the Role of Self-Control in Investor Behavior," EconStor Preprints 177890, ZBW - Leibniz Information Centre for Economics.

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