Measuring the Disposition Effect
44 Pages Posted: 8 Feb 2020 Last revised: 5 Jan 2021
Date Written: January 6, 2020
Despite hundreds of papers confirming the existence of the disposition effect, too little attention has been devoted to the prevailing arguments on the choice of a given method to measure it. This paper fills this gap and compares different measurement approaches. First, based on empirical and simulation-based data, I show how results may differ across measures depending on market trends but, more importantly, on the frequency at which investors make their decisions. Second, the pitfalls in analyzing cross-sectional differences in the disposition effect are illustrated and discussed. Finally, I clearly show that hazard models are quite appropriate for measuring the disposition effect of any investor, be it a day trader or a typical retail investor who monitors his portfolio infrequently.
Keywords: Disposition effect, Individual investors, Behavioral finance
JEL Classification: G11, G40
Suggested Citation: Suggested Citation