Disastrous Selling Decisions: The Disposition Effect and Natural Disasters

Abstract

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