Decomposing the Disposition Effect

Authors:

Maier, Johannes K. (LMU Munich and CESifo)
Fischer, Dominik S. (CRA)

Abstract:

We theoretically show that there is a fundamental disconnect be- tween the disposition effect, i.e., investors’ tendency to sell winning assets too early and losing assets too late, and its common empirical measure, namely a positive difference between the proportion of gains and losses re- alized. While its common measure cannot identify the disposition effect, it identifies the presence of some systematic bias. We further investigate the measure’s comparative statics regarding markets, investors’ informa- tion level, and their attention. Besides generating novel testable predictions, this analysis reveals that, in contrast to the measure’s sign, variations in its magnitude are informative for its cause.

Keywords:

disposition effect; rational benchmark; investor behavior; behavioral biases; market segments; financial attention; information level

JEL-Classification:

D90; D91; D83; D84; G11; G40; G41

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Decomposing the Disposition Effect
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