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Retail Investors’ Disposition Effect and Order Choices

Author

Listed:
  • De Winne, Rudy

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • Luong, Nhung

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • Palan, Stefan

    (University of Graz)

Abstract

Retail investors are prone to the disposition effect and submit many more limit orders than market orders. Mechanical effects stemming from the price-contingency conditions for order executions can lead these limit orders to inflate an investor’s measured disposition effect (Linnainmaa 2010). Our paper is the first to demonstrate that the relationship between the disposition effect and order choices is bi-directional. Using a controlled experiment on the one hand and empirical trading data of thousands of investors on the other hand, we show that investors who are prone to the disposition effect differ from others in their use of limit orders and in their choice of limit prices.

Suggested Citation

  • De Winne, Rudy & Luong, Nhung & Palan, Stefan, 2022. "Retail Investors’ Disposition Effect and Order Choices," LIDAM Discussion Papers LFIN 2022012, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlf:2022012
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    References listed on IDEAS

    as
    1. Weber, Martin & Welfens, Frank, 2007. "An Individual Level Analysis of the Disposition Effect: Empirical and Experimental Evidence," Sonderforschungsbereich 504 Publications 07-45, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    2. Juhani T. Linnainmaa, 2010. "Do Limit Orders Alter Inferences about Investor Performance and Behavior?," Journal of Finance, American Finance Association, vol. 65(4), pages 1473-1506, August.
    3. repec:bla:jfinan:v:53:y:1998:i:5:p:1775-1798 is not listed on IDEAS
    4. 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.
    5. 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.
    6. 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.
    7. 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.
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    Cited by:

    1. Stephen L Cheung, 2024. "A meta-analysis of disposition effect experiments," Working Papers 2024-02, University of Sydney, School of Economics.

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