Splitting the Disposition Effect: Asymmetric Reactions Towards 'Selling Winners' and 'Holding Losers'

Abstract

The disposition effect describes investors' common tendency of quitting a winning investment too soon and holding on to losing investments too long. Since Shefrin and Statman (1985), the two sides of the disposition effect, i.e. "selling winners" and "holding losers", have been assessed as one coherent bias. High-disposition investors are usually modeled to sell their winners quickly while almost never selling losers, while low-disposition investors are assumed to behave in the opposite way. Investigating both account level field data as well as data from a controlled laboratory experiment, we however show that individual investors' reactions towards "selling winners" and "holding losers" are completely independent, meaning that the disposition effect is better depicted as two separate biases, investors' "preference for cashing-in gains" and their "loss realization aversion". Furthermore, investors' individual preferences towards both sides are also stable over tasks and time so that both biases can be seen and modeled as individual per-sonality traits.

Keywords: Decision analysis: Risk, Decision analysis: Sequential

JEL Classification: C91, D14, D81, G11, G12