Wide Framing Disposition Effect: An Empirical Study

Journal of Economic Behavior & Organization, Volume 185, May 2021, Pages 330-347

36 Pages Posted: 18 Feb 2021 Last revised: 24 May 2021

See all articles by Julia Brettschneider

Julia Brettschneider

University of Warwick - Department of Statistics

Giovanni Burro

Heidelberg University - Alfred Weber Institute for Economics

Vicky Henderson

University of Warwick

Date Written: February 2, 2021

Abstract

We estimate the disposition effect for active traders in a large discount brokerage dataset containing US households’ trading records between 1991 and 1996. We apply a wide framing perspective, focusing on portfolios rather than individual stocks. We find that the disposition effect varies inversely with the proportion of stocks trading at a gain in the portfolio, nearly vanishing when this proportion reaches 50%. This is driven by how the realisation of gains and losses depends on the percentage of gains in the account. The probability to realise a loss increases with the percentage of gains in the account. The relation between the probability of realising a gain and the percentage of gains in the bank account follows a U-shape. We also estimate the change in the disposition effect when an investor realises more than one stock on a trading day. We find when investors sell a stock, they are much more likely to also realise another stock on the same day. In particular, selling a loss increases an investor’s propensity to sell a gain and vice versa. This key finding provides an explanation for the observed dependency of the disposition effect on the portfolio composition. We also propose several psychological explanations for our findings.

Keywords: Disposition Effect, Wide Framing, Portfolio Disposition Effect, Stock Market

JEL Classification: C55, D90, G40

Suggested Citation

Brettschneider, Julia and Burro, Giovanni and Henderson, Vicky, Wide Framing Disposition Effect: An Empirical Study (February 2, 2021). Journal of Economic Behavior & Organization, Volume 185, May 2021, Pages 330-347, Available at SSRN: https://ssrn.com/abstract=3778099 or http://dx.doi.org/10.2139/ssrn.3778099

Julia Brettschneider

University of Warwick - Department of Statistics ( email )

Giovanni Burro (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics

Bergheimer Str. 58
Heidelberg, 69115
Germany

Vicky Henderson

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom
44 (0)2476 574811 (Phone)

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