A study of prominence for disposition effect: a systematic review

Abstract

Purpose The purpose of this paper is to study the disposition effect that is exhibited by the investors through the review of research articles in the area of behavioral finance. When the investors are hesitant to realize the losses and quick to realize the gains, this phenomenon is known as the disposition effect. This paper explains various theories, which have been evolved over the years that has explained the phenomenon of disposition effect. It includes the behavior of individual investors, institutional investors and mutual fund managers. Design/methodology/approach The authors have used the existing literatures from the various authors, who have studied the disposition effect in either real market or the experimental market. This paper includes literature over a period of 40 years, that is, Dyl, 1977, in the form of tax loss selling, to the most recent paper, Surya et al. (2017). Some authors have used the PGR-PLR ratio for calculating the disposition effect in their study. However, some authors have used t-test, ANNOVA, Correlation coefficient, Standard deviation, Regression, etc., as a tool to find the presence of disposition effect. Findings The effect of disposition can be changed for different types of individual investors, institutional investors and mutual funds. The individual investors are largely prone to the disposition effect and the demographic variables like age, gender, experience, investor sophistication also impact the occurrence of the disposition effect. On the other side, the institutional investors and mutual funds managers may or may not be affected by the disposition effect. Practical implications The skilled understanding of the disposition effect will help the investors, financial institutions and policy-makers to reduce the adverse effect of this bias in the stock market. This paper contributes a detailed explanation of disposition effect and its impacts on the investors. The study of disposition effect has been found to be insufficient in the context of Indian capital market. Social implications The investors and society at large can gains insights about causes and influences of disposition effect which will be helpful to create sound investment decisions. Originality/value This paper has complied the 11 causes for the occurrence of disposition effect that are found by the different authors. The paper also highlights the impact of the disposition effect in the decision-making of various investors.

The effect of essential information and disposition effect on shifting decision investment

“…Trading and investing both include investing in the hope of making a profit. A trader will sell his shares when the target is met or "obliged" to come out to minimize losses (Zahera & Bansal, 2019). Investors are loss averse, the disposition effect makes investors sell the shares of the firms with good outlook too quickly and hold the shares of the firms with gloomy outlook too long.…”

“…Conversely, investors will experience more significant losses because they do not immediately sell losers' shares as a prospect theory. Several causes were identified, including prospect theory, mental accounting, regret aversion, seeking pride, stop losses, December effect, overconfidence, sign realization preference, mean reversion, entrapment research, and social trust (Zahera & Bansal, 2019). Investors in making decisions tend to sort various investment types into different accounts by ignoring the correlation between accounts, just like an investment portfolio (Makoni & Marozva, 2018).…”

“…Losses experienced by investors positively impact the disposition effect even though they reduce investors' gains (Tenberge, 2009). Stop losses are a decision made by investors to postpone selling shares that generate gains until they reach the correct price and avoid detaining or selling shares whose prices have fallen (Zahera & Bansal, 2019;Fischbacher et al, 2017). Overconfidence is a behavior that investors have with confidence that the investment they hold will provide good value in the future, thereby increasing the disposition effect (Ahmad, 2020).…”

“…Investors who make short-term investments, called traders, carry out day-to-day trading activities where buying and selling transactions are carried out more than once a day. Conversely, when investors need investment to overcome long-term obligations, investors are advised to use their funds on long-term investment activities, namely, activities buy and hold on the stock market (Zahera & Bansal, 2019). Investors have invested in shares before the COVID-19 (Pandemic Coronavirus Disease), estimated to be in late December 2019 in Wuhan, China.…”

Impact of Personality Traits on The Investor Sentiment

“…The disposition effect is investors' tendency to sell profitable stock investments earlier and hold the losing ones for longer. Its fundamental aim is to maximize returns while delaying losses (Zahera & Bansal, 2019). The disposition effect in the stock market was first identified empirically by Shefrin & Statman (1985) with a broader development of the approaching model adopted by Kahneman and Tversky regarding the reluctance to realize losses under uncertainty.…”