The Prevalence of the Disposition Effect in Mutual Funds' Trades

42 Pages Posted: 28 May 2014 Last revised: 20 Feb 2020

See all articles by Gjergji Cici

Gjergji Cici

University of Kansas - School of Business

Date Written: April 22, 2011

Abstract

U.S. equity mutual funds, on average, prefer realization of capital losses to capital gains. Nevertheless, a substantial fraction exhibits the disposition effect of realizing gains more readily than losses. My analysis suggests that learning effects have reduced the manifestation of the disposition effect over time, implying that academic research has influenced industry practices. When funds experience outflows and are managed by teams of portfolio managers, they are more susceptible to selling disproportionately more winners than losers. Disposition-driven behavior affects investment style, causing lower market betas and characteristics of value-oriented and contrarian styles, but has no observable effect on fund performance.

Keywords: Mutual funds, disposition effect, flows, behavioral biases, performance, style

JEL Classification: G1, G2

Suggested Citation

Cici, Gjergji, The Prevalence of the Disposition Effect in Mutual Funds' Trades (April 22, 2011). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2441732

Gjergji Cici (Contact Author)

University of Kansas - School of Business ( email )

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1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-3873 (Phone)

HOME PAGE: http://business.ku.edu/gjergji-cici

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