Retail Investors' Disposition Effect and Order Choices *

Abstract

Studying controlled experiment data and extensive empirical trading data we show that the disposition effect (DE) affects investors' order submissions. Where Linnainmaa (2010) argues that the use of limit orders biases the measured DE upward, we argue that high-DE investors display a greater propensity to submit sell orders in the gain domain than in the loss domain, and to set the sell limit price at or above the purchase price for positions at loss. DE levels are thus affected by hitherto unreported strategic or unconscious effects from order choices that reflect individuals' intrinsic propensity to act in accordance with the DE.

Keywords: disposition effect, order choice, limit orders, retail investors

JEL Classification: G11, G40