Human vs. Machine: Disposition Effect Among Algorithmic and Human Day-traders

Karolis Liaudinskas

No 1133, Working Papers from Barcelona School of Economics

Abstract: Can humans achieve rationality, as defined by the expected utility theory, by automating their decision making? We use millisecond-stamped transaction-level data from the Copenhagen Stock Exchange to estimate the disposition effect – the tendency to sell winning but not losing stocks – among algorithmic and human professional day-traders. We find that: (1) the disposition effect is substantial among humans but virtually zero among algorithms; (2) this difference is not fully explained by rational explanations and is, at least partially, attributed to prospect theory, realization utility and beliefs in mean-reversion; (3) the disposition effect harms trading performance, which further deems such behavior irrational.

Keywords: disposition effect; algorithmic trading; financial markets; rationality; automation (search for similar items in EconPapers)
JEL-codes: D8 D91 G11 G12 G23 G41 O3 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-big, nep-cbe, nep-cmp, nep-exp, nep-mst, nep-ore and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1133

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