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Are Investors Really Reluctant to Realize their Losses? Trading Responses to Past Returns and the Disposition Effect

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

81 Pages Posted: 3 Jul 2011 Last revised: 24 Oct 2012

Itzhak Ben-David

Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Date Written: October 24, 2012

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.

Keywords: disposition effect, realization preference, loss avoidance, loss aversion, prospect theory, individual investors

JEL Classification: G11, G12, G14

Suggested Citation

Ben-David, Itzhak and Hirshleifer, David A., Are Investors Really Reluctant to Realize their Losses? Trading Responses to Past Returns and the Disposition Effect (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. Available at SSRN: https://ssrn.com/abstract=1876594 or http://dx.doi.org/10.2139/ssrn.1876594

Itzhak Ben-David (Contact Author)

Ohio State University - Fisher College of Business, Finance Department ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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