Decomposing the Disposition Effect

Maier, Johannes K. and Fischer, Dominik S. (18. October 2021): Decomposing the Disposition Effect. Collaborative Research Center Transregio 190, Discussion Paper No. 288

Abstract

We theoretically show that there is a fundamental disconnect between the disposition effect, i.e., investors’ tendency to sell winning assets too early and losing assets too late, and its common empirical measure, namely a positive difference between the proportion of gains and losses realized. While its common measure cannot identify the disposition effect, it identifies the presence of some systematic bias. We further investigate the measure’s comparative statics regarding markets, investors’ information level, and their attention. Besides generating novel testable predictions, this analysis reveals that, in contrast to the measure’s sign, variations in its magnitude are informative for its cause

Abstract

Disposition Effect, Rational Benchmark, Investor Behavior, Behavioral Biases, Market Segments, Financial Attention, Information Level

• Item Type: Paper
• Keywords: Fairness, inequity aversion, bargaining, ultimatum game, matching market, search costs, competitive equilibrium
• Faculties: Economics; Economics > Collaborative Research Center Transregio "Rationality and Competition"
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D90, D91, D83, G11, G40, G41, D84