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

See all articles by Daniel W. Richards

Daniel W. Richards

York University - Faculty of Liberal Arts & Professional Studies

Janette Rutterford

The Open University - Business School

Devendra G. Kodwani

The Open University, UK

Mark P. Fenton-O'Creevy

Open University, UK

Date Written: June 1, 2015

Abstract

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

Richards, Daniel and Rutterford, Janette Marie and Kodwani, Devendra G. and Fenton-O'Creevy, Mark P., Stock Market Investors’ Use of Stop Losses and the Disposition Effect (June 1, 2015). The European Journal of Finance, Vol. 23, Issue 2, pp. 130-152 (2015), Available at SSRN: https://ssrn.com/abstract=2612898 or http://dx.doi.org/10.2139/ssrn.2612898

Daniel Richards (Contact Author)

York University - Faculty of Liberal Arts & Professional Studies ( email )

Toronto, Ontario M3J 1P3
Canada

Janette Marie Rutterford

The Open University - Business School ( email )

Walton Hall
Milton Keynes, MK6 7AA
United Kingdom
00441908655812 (Phone)
00441908655898 (Fax)

Devendra G. Kodwani

The Open University, UK ( email )

Milton Keynes, MK6 7AA
United Kingdom

HOME PAGE: http://www.open.ac.uk/oubs

Mark P. Fenton-O'Creevy

Open University, UK ( email )

Walton Hall
Milton Keynes, Buckinghamshire MK7 6AA
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
19
Abstract Views
611
PlumX Metrics