An Individual Level Analysis of the Disposition Effect: Empirical and Experimental Evidence

Abstract

The disposition effect describes investors’ common tendency of quitting a winning investment too soon and holding on to losing investments too long (Shefrin and Statman 1985). Our paper analyses individual level disposition effects using both account level field data as well as a controlled laboratory experiment. While we observe the disposition effect on aggregate, the extent to which a single decision maker is affected varies considerably across investors. We find overwhelming evidence for relative stability of individual disposition effects both within and across tasks, as well as across time. Learning, nevertheless, attenuates the magnitude of the effect strongly both within tasks and over time. In accordance with prior research, we also document that frequent traders sell their winners less and their losers more often, resulting in lower disposition effects.