Slow Belief Updating and the Disposition Effect

47 Pages Posted: 30 Sep 2022 Last revised: 29 Nov 2022

See all articles by Aleksi Pitkäjärvi

Aleksi Pitkäjärvi

Vrije Universiteit Amsterdam; Tinbergen Institute

Date Written: September 27, 2022


I present a theory of investor selling behavior in which the disposition effect arises because investors are slow to update their beliefs about the values of the assets they hold. I show numerically that the theory generates a disposition effect, propensity to sell functions, and other trading statistics that are in line with empirical estimates. I also show that the theory generates a reversed disposition effect at the end of the tax year, a weaker effect for more sophisticated investors, a stronger effect in more volatile stocks, and a disposition effect in short sales.

Keywords: disposition effect, slow belief updating, investor behavior, behavioral finance, investor beliefs, belief updating

JEL Classification: G40, G41, G50, G11

Suggested Citation

Pitkäjärvi, Aleksi, Slow Belief Updating and the Disposition Effect (September 27, 2022). Available at SSRN: or

Aleksi Pitkäjärvi (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081 HV

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA

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