The disposition effect among mutual fund participants: a re-examination

Paulo Pereira da Silva, Victor Mendes and Margarida Abreu

The European Journal of Finance, 2022, vol. 28, issue 12, 1237-1256

Abstract: Based on the information gathered on mutual fund trades executed between 1998 and 2017 by 31,513 individual investor clients of a major Portuguese bank, we study the relationship between the disposition effect, financial literacy and trading experience. We find that mutual fund investors exhibit a strong disposition effect. The tendency to hold losers is partially offset with literacy: a university degree reduces the propensity to hold on to loser funds, in addition to greater financial knowledge and stronger math skills. Literacy also plays a role in shaping the way experience affects this bias. Evidence of the disposition effect remains after considering redemption fees, bad emotions, irrational beliefs, market sentiment and the existence of someone to blame. Given that the existence of the disposition effect entails substantial costs for investors, higher levels of literacy benefit investors. The implementation of measures that accommodate investor reaction to poor performances may also help to reduce the disposition effect.

Date: 2022
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Working Paper: THE DISPOSITION EFFECT AMONG MUTUAL FUND PARTICIPANTS: A RE-EXAMINATION (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:28:y:2022:i:12:p:1237-1256

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DOI: 10.1080/1351847X.2021.1998176

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