Disposition Effect and Firm Size: New Evidence on Individual Investor Trading Activity
49 Pages Posted: 17 Dec 2001
Date Written: May 2001
Abstract
Economists and investment professionals have long been puzzled by the tendency of individual investors to sell the winners from their stock portfolio and to hold on to the losers. I analyze the daily trading records of 78,000 clients of a discount brokerage house over six years and document, surprisingly, that such behavior (known as the disposition effect) is concentrated primarily in large-cap stocks. Trades in stocks at the bottom 40 percent of the market capitalization distribution exhibit a reverse disposition effect: investors keep their winners and realize their losers. Moreover, the relationship between firm size and the disposition effect appears to be monotonic. The larger the market capitalization of the firm, the more likely people are to realize their gain and to hold on to their loss. This new evidence challenges the current view of the literature that the disposition effect is an implication of a prospect-theory type of individual preferences.
I examine different potential explanations for the size dependence of the disposition effect, such as margin calls being triggered more often by the more volatile small stocks, different trading styles in small stocks and large stocks and different behavior with regard to small and large gains and losses. My findings are consistent with a view that individual beliefs rather than preferences are generating the disposition effect.
Keywords: disposition effect, risk taking, trading behavior
JEL Classification: D8, G00, G12
Suggested Citation: Suggested Citation
Register to save articles to
your library
Paper statistics
Recommended Papers
-
The Behavior of Individual Investors
By Brad M. Barber and Terrance Odean
-
Behavioral Portfolio Analysis of Individual Investors
By Arvid O. I. Hoffmann, Hersh Shefrin, ...
-
Up Close and Personal: An Individual Level Analysis of the Disposition Effect
-
A Quantitative Approach to Tactical Asset Allocation
By Meb Faber
-
Chapter 1: Investor Behavior: An Overview
By H. Kent Baker and Victor Ricciardi
-
Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias
-
Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?
By Mark S. Seasholes and Lei Feng
-
How Investor Perceptions Drive Actual Trading and Risk-Taking Behavior
By Arvid O. I. Hoffmann, Thomas Post, ...
-
Individual Investor Perceptions and Behavior During the Financial Crisis
By Arvid O. I. Hoffmann, Thomas Post, ...