Stock Market Investors’ Use of Stop Losses and the Disposition Effect
The European Journal of Finance, Vol. 23, Issue 2, pp. 130-152 (2015)
42 Pages Posted: 2 Jun 2015 Last revised: 5 Jan 2020
Date Written: June 1, 2015
The disposition effect is an investment bias where investors hold stocks at a loss longer than stocks at a gain. This bias is associated with poorer investment performance and exhibited to a greater extent by investors with less experience and less sophistication. A method of managing susceptibility to the bias is through use of stop losses. Using the trading records of UK stock market individual investors from 2006 to 2009, this paper shows that stop losses used as part of investment decisions are an effective tool for inoculating against the disposition effect. We also show that investors who use stop losses have less experience and that, when not using stop losses, these investors are more reluctant to realise losses than other investors.
Keywords: disposition effect, behavioral finance, stop losses, sophistication bias
JEL Classification: G02, G11
Suggested Citation: Suggested Citation