Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?

Lei Feng and Mark Seasholes

Review of Finance, 2005, vol. 9, issue 3, 305-351

Abstract: 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. Copyright Springer 2005

Date: 2005
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DOI: 10.1007/s10679-005-2262-0

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