The Portfolio-Driven Disposition Effect

Abstract

Using retail trading and experimental data from the US and China, we show that the disposition effect is significantly stronger when an investor’s portfolio is at a loss, a phenomenon we label “the portfolio-driven disposition effect” (PDDE). We show that the PDDE affects seller-initiated trading volume and stock returns around and following earnings announcements, and that it is associated with a reduction in investors’ future trading performance. In our trading game experiments, the PDDE is significantly stronger among subjects whose survey responses are consistent with Thaler’s (1985) principles of mental framing, suggesting the PDDE is driven by hedonic mental accounting.

Keywords: Disposition Effect, Realization Utility

JEL Classification: G11, G12, G40