Retail investors’ disposition effect and order choices

The disposition effect (DE)—the tendency to sell winning investments and hold on to losing investments—is well-documented in financial market transactions. Yet, there is little research into the types and pricing of the orders that lead to these transactions. Using a controlled laboratory experiment, we show that investors’ empirical DE measures, though potentially biased by limit order mechanics, still serve as informative proxies for investors’ respective DE levels. Combining our experimental results with data from retail brokerage accounts from a Belgian online broker spanning 2003–2021, we find that high-DE investors display a stronger dependence on the purchase price: they submit relatively more sell orders when positions are at a gain than at a loss; in the loss domain, they are more likely to choose sell limit prices at or above the purchase price, set these limit prices farther above prevailing market prices, and rely more on good-till-canceled instructions. Overall, our findings show that the DE is reflected not only in whether investors sell but also in how they sell, highlighting the feasibility of studying the DE from order, rather than solely from transaction, data.