Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?

55 Pages Posted: 25 Sep 2005  

Mark S. Seasholes

Hong Kong University of Science & Technology (HKUST)

Lei Feng

Harvard Business School

Date Written: June 6, 2005

Abstract

This paper provides an in depth analysis of an investor's reluctance to realize losses and his propensity to realize gains - a behavior known as the disposition effect. Together, sophistication (static differences across investors) and trading experience (evolving behavior of a single investor) eliminate the reluctance to realize losses. However, an asymmetry exists as sophistication and trading experience reduce the propensity to realize gains by 37% (but fail to eliminate this part of the behavior.) Our research design allows us to follow an individual's behavior from the start of his investing life/career. This ability makes it possible to track the evolution of the disposition effect as it is reduced and/or disappears. Our results are robust to alternative explanations including feedback trading, calendar effects, and frequency of observation.

Keywords: Experience, behavioral biases, disposition effect

JEL Classification: G11, G15, G24

Suggested Citation

Seasholes, Mark S. and Feng, Lei, Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets? (June 6, 2005). Available at SSRN: https://ssrn.com/abstract=694769 or http://dx.doi.org/10.2139/ssrn.694769

Mark S. Seasholes (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clear Water Bay, Kowloon
Hong Kong
+852 2358-7668 (Phone)

HOME PAGE: http://www.seasholes.com

Lei Feng

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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