Decomposing the Disposition Effect

Johannes Maier and Dominik S. Fischer

No 9334, CESifo Working Paper Series from CESifo

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.

Keywords: disposition effect; rational benchmark; investor behaviour; behavioural biases; market segments; financial attention; information level (search for similar items in EconPapers)
JEL-codes: D83 D84 D90 D91 G11 G40 G41 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cwa and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9334

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