Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?
55 Pages Posted: 25 Sep 2005
Date Written: June 6, 2005
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: Suggested Citation