Beyond the Disposition Effect: Do Investors Really Like Gains More Than Losses?

The disposition effect (greater realization of winners than losers) is often taken as proof that investors have an inherent preference for realizing winners over losers. In contrast, we find that the disposition effect is not primarily driven by realization preference. The probability of selling as a function of profit is V-shaped, so that at short holding periods investors are much more likely to sell big losers than small ones. There is little indication of a jump discontinuity in selling probability at zero profits, as implied by an investor concern for the sign of realized returns. In a placebo test, there is a reverse disposition effect for the probability of buying additional shares. The speculative motive for trade potentially helps explain these findings.