Are Professional Traders Too Slow to Realize Their Losses?

Posted: 10 Aug 2004

See all articles by Ryan Garvey

Ryan Garvey

University College Dublin - Department of Economics

Anthony Murphy

University of Oxford - Nuffield College of Medicine

Abstract

Data on a U.S. proprietary stock-trading team provide evidence of the tendency of traders to hold on to their losers too long and sell their winners too soon - that is, the disposition effect. The group of traders studied earned more than $1.4 million in intraday trading profits, but they realized their winning trades at a much faster rate than their losing trades. This tendency lowered their profitability. When the traders limited their risk exposure by trading in small share sizes, in low-priced stocks, or during periods of low volatility, the discrepancy between losing and winning holding times rose. An analysis of intraday prices suggests that traders could increase trading profits by holding winners longer and selling losers sooner.

Keywords: Investment Theory: Behavioral Finance; Portfolio Management: Trading and Execution

Suggested Citation

Garvey, Ryan and Murphy, Anthony, Are Professional Traders Too Slow to Realize Their Losses?. Financial Analysts Journal, Vol. 60, No. 4, pp. 35-43, July/August 2004. Available at SSRN: https://ssrn.com/abstract=574741

Ryan Garvey (Contact Author)

University College Dublin - Department of Economics ( email )

Dublin 4, 4
Ireland

Anthony Murphy

University of Oxford - Nuffield College of Medicine ( email )

New Road
Oxford, OX1 1NF
United Kingdom

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