The Portfolio-Driven Disposition Effect
60 Pages Posted: 6 Mar 2018 Last revised: 6 Jun 2022
Date Written: June 3, 2022
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
Suggested Citation: Suggested Citation