Slow Belief Updating and the Disposition Effect
47 Pages Posted: 30 Sep 2022 Last revised: 29 Nov 2022
Date Written: September 27, 2022
Abstract
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: Suggested Citation