An Experimental Study on Disposition Effect: Psychological Biases, Trading Strategies, and Assets Holding Time
18 Pages Posted: 17 Feb 2014 Last revised: 6 Mar 2014
Date Written: February 18, 2014
Disposition effect is one phenomenon in behavioral finance that describes investor tendency to sell winner stocks too early and hold loser stocks too long. The purpose of this paper is to examine the disposition effect from investor perspective when they respond to short-run and long-run return in their stocks. Disposition effect will also be associated with momentum trading, contrarian trading, and investor holding time of the stocks. Using experimental research, we find that psychological biases as regret aversion and loss aversion can explain disposition effect. It is demonstrated by investors who behave as momentum trading when respond to short-run return and become contrarian trader when they react to long-run return. This existence of disposition effect is also supported by another experiment session showing that there is a holding time discrepancy between winner and loser asset owned by investor.
Keywords: Disposition effect, momentum trader, contrarian trader, loss aversion, regret aversion, holding time, Indonesia
JEL Classification: C91, C92, G02
Suggested Citation: Suggested Citation