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Are Investors Really Reluctant to Realize their Losses? Trading Responses to Past Returns and the Disposition EffectItzhak Ben-DavidOhio State University - Fisher College of Business, Finance Department David A. HirshleiferUniversity of California, Irvine - Paul Merage School of Business October 24, 2012 Review of Financial Studies 25(8), 2485-2532 Fisher College of Business Working Paper No. 2011-03-013 Dice Center Working Paper No. 2011-13 Abstract: We examine how investor preferences and beliefs affect trading in relation to past gains and losses. The probability of selling as a function of profit is V-shaped; at short holding periods, investors are more likely to sell big losers than small ones. There is little evidence of an upward jump in selling at zero profits. These findings provide no clear indication that realization preference explains trading. Furthermore, the disposition effect is not driven by a simple direct preference for selling a stock by virtue of having a gain versus loss. Trading based on belief revisions can potentially explain these findings.
Number of Pages in PDF File: 81 Keywords: disposition effect, realization preference, loss avoidance, loss aversion, prospect theory, individual investors JEL Classification: G11, G12, G14 Accepted Paper SeriesDate posted: July 3, 2011 ; Last revised: October 24, 2012Suggested CitationContact Information
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