An experimental analysis of the disposition effect: Who and when?

Abstract

The disposition effect (DE) is a common bias by which investors tend to sell winning assets too soon and hold losing assets too long. We complement the existing evidence in three directions. First, we check whether the DE is robust to realistic features such as transaction costs and competitive payment schemes. Second, by using a gender-balanced design, we check for gender differences. Third, we search for psychological correlates of the DE. We find that the DE is positive and significant in all our treatments. We do not find significant differences across treatments, although transaction costs significantly reduce the propensity to sell both winners and losers. We find somewhat larger DE in women, but this effect is only significant in the second half of the experiment. On the other hand, women are more reluctant to sell losing assets throughout the experiment. Finally, we find that the most significant psychological predictors of the DE are difficulty recognizing one's mistakes and optimism. Subjects scoring high in these traits are less likely to sell at a loss and therefore exhibit a larger DE. Our results provide further suggestive evidence of cognitive dissonance as an important determinant of the DE.

Moored Minds: An Experimental Insight into the Impact of the Anchoring and Disposition Effect on Portfolio Performance

“…Chui found that belief in mean reversion does not affect the disposition effect and observed that internal locus of control has morepronounced disposition effects. Subsequently, studies established the relationship between the disposition effect and investors' characteristics such as gender (Da Costa et al 2008;Rau 2015;Braga and Fávero 2017;Cueva et al 2019), experience (Dhar and Zhu 2006;Da Costa et al 2013), and various activities and interventions (Bulipopova et al 2014;Rau 2015;Cao et al 2022). The investigations above into the disposition effect have primarily focused on countries like the United States, Europe, and parts of Asia-particularly China.…”

Boys will still be boys: Gender differences in trading activity are not due to differences in (over)confidence

“…This task has been widely used in the study of the disposition effect, another well-known bias in behavioral finance. We use the data collected in this experiment to investigate the disposition effect in a separate paper (Cueva et al 2018).…”

“…Among the various measures collected, we primarily focus on risk aversion and financial literacy, since these are most likely to have a chance of explaining some portion of the gender gap in trade volume a priori. The other psychological measures include a short version of the Big Five test and some items aimed at exploring the sources of the disposition effect, investigated in a separate study (Cueva et al 2018). 5 These variables are used as additional controls in the last part of our analysis (see Appendix C for details).…”

Can Personality Traits, Risk Attitude, and Demographics Explain Fund Managers’ Disposition Effect?

“…This outcome was also found for the cutting gains bias. Finally, according to Cueva et al (2019), disposition effect and cutting gains scores are negatively related to experience.…”