34 Pages Posted: 1 Jun 1998
Date Written: December 1997
I test the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon, by analyzing trading records for 10,000 accounts at a large
discount brokerage house. These investors demonstrate a strong preference for realizing winners rather than losers. Their behavior does not appear to be motivated by a desire to rebalance
portfolios, or to avoid the higher trading costs of low price stocks. Nor is it justified by subsequent portfolio performance. For taxable investments, it is sub-optimal and leads to lower
after-tax returns. Tax-motivated selling is most evident in December.
JEL Classification: G10, G11
Suggested Citation: Suggested Citation