Up Close and Personal: An Individual Level Analysis of the Disposition Effect

39 Pages Posted: 11 Mar 2002  

Ravi Dhar

Yale School of Management - International Center for Finance

Ning Zhu

China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management

Date Written: August 2002

Abstract

In this paper, we analyze the trading records of a major discount brokerage house to investigate the disposition effect, the tendency to sell winners too quickly than losers. In contrast to previous research that has demonstrated the disposition effect by aggregating across investors (Odean, 1998), our main objective is to identify individual differences in the disposition bias and explain this in terms of underlying investor characteristics. Building on the findings in experimental economics and self-correction in psychology, we hypothesize that investors' sophistication about financial markets and trading experience is responsible in part for the variation in individual disposition effect. Using demographic and socio-economic data as proxies for investors' sophistication, we find empirical evidence that wealthier and individual investors in professional occupations exhibit less disposition effect. Consistent with experimental economics, trading experience also tends to reduce the disposition effect. We provide guidelines for investment advisors, regulators and investment communities to utilize our findings and help investors make better decisions.

Keywords: Disposition Effect, Investor Sophistication, Individual Decision Making

JEL Classification: G10

Suggested Citation

Dhar, Ravi and Zhu, Ning, Up Close and Personal: An Individual Level Analysis of the Disposition Effect (August 2002). Yale ICF Working Paper No. 02-20. Available at SSRN: https://ssrn.com/abstract=302245 or http://dx.doi.org/10.2139/ssrn.302245

Ravi Dhar

Yale School of Management - International Center for Finance ( email )

Box 208200
New Haven, CT 06520-8200
United States

Ning Zhu (Contact Author)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Yale School of Management ( email )

135 Prospect Street
Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://pantheon.yale.edu/~nz26/

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-3871 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/Faculty/Zhu/

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