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Measuring the disposition effect

Author

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  • De Winne, Rudy

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

Abstract

Despite hundreds of papers confirming the existence of the disposition effect, too little attention has been devoted to the prevailing arguments on the choice of a given method to measure it. This paper fills this gap and compares different measurement approaches. First, based on empirical and simulationbased data, I show how results may differ across measures depending on market trends but, more importantly, on the frequency at which investors make their decisions. Second, the pitfalls in analyzing cross-sectional differences in the disposition effect are illustrated and discussed. Finally, I clearly show that hazard models are quite appropriate to measuring the disposition effect of any investor, be it a day trader or a typical retail investor who monitors his portfolio infrequently.

Suggested Citation

  • De Winne, Rudy, 2021. "Measuring the disposition effect," LIDAM Reprints LFIN 2021002, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlr:2021002
    DOI: https://doi.org/10.1016/j.jbef.2021.100468
    Note: In: Journal of Behavioral and Experimental Finance, 2021, vol. 29, 100468
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    Cited by:

    1. Chen, Chen & Lu, Xiaomeng & Zhang, Yixing, 2023. "Is attention-based stock buying profitable? Empirical evidence from Chinese individual investors," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    2. Bachmann, Kremena, 2024. "Do you have a choice?: Implications for belief updating and the disposition effect," Journal of Economic Psychology, Elsevier, vol. 102(C).
    3. Basha, Shabeen Afsar & Bennasr, Hamdi & Goaied, Mohamed, 2023. "Financial literacy, financial development, and leverage of small firms," International Review of Financial Analysis, Elsevier, vol. 86(C).
    4. De Bondt, Werner & De Winne, Rudy & D’Hondt, Catherine, 2024. "Measuring speculation beyond day trading and bets on lottery-like stocks," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    5. Zhang, Xiaotao & Wang, Ziqiao & Hao, Jing & Liu, Jiubiao, 2022. "Stock market entry timing and retail investors' disposition effect," International Review of Financial Analysis, Elsevier, vol. 82(C).

    More about this item

    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General

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