Are Investors Really Reluctant to Realize their Losses? Trading Responses to Past Returns and the Disposition Effect
Ohio State University - Fisher College of Business, Finance Department
David A. Hirshleifer
University 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
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, G14Accepted Paper Series
Date posted: July 3, 2011 ; Last revised: October 24, 2012
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