Disastrous Selling Decisions: The Disposition Effect and Natural Disasters
59 Pages Posted: 22 Apr 2019 Last revised: 3 Jan 2022
Date Written: December 1, 2021
Combining county-level natural disaster data with individual investor transactions, I document an increased disposition effect for investors impacted by a natural disaster. This effect is increasing in disaster severity and decreasing in the length of time following the event, suggesting that extreme natural disasters can significantly influence investor behavior, especially in the short term. These findings are not explained by liquidity needs, tax incentives, or informed trading. The effect strengthens with local stocks and investors’ duration at their residence. Moreover, the increased disposition effect of disaster-affected investors is consistent with investors deriving utility from environmental damages and realized gains/losses.
Keywords: The Disposition Effect, Investor Behavior, Natural Disasters, Realization Utility
JEL Classification: G02, G11, G12
Suggested Citation: Suggested Citation