Professional Documents
Culture Documents
A Study of Prominence For Disposition e Ffect: A Systematic Review
A Study of Prominence For Disposition e Ffect: A Systematic Review
www.emeraldinsight.com/1755-4179.htm
QRFM
11,1 A study of prominence for
disposition effect: a
systematic review
2 Syed Aliya Zahera and Rohit Bansal
Department of Management Studies,
Received 4 July 2018 Rajiv Gandhi Institute of Petroleum Technology, Rae Bareli, India
Revised 17 August 2018
Accepted 5 September 2018
Abstract
Purpose – The purpose of this paper is to study the disposition effect that is exhibited by the investors
through the review of research articles in the area of behavioral finance. When the investors are hesitant to
realize the losses and quick to realize the gains, this phenomenon is known as the disposition effect. This
paper explains various theories, which have been evolved over the years that has explained the phenomenon
of disposition effect. It includes the behavior of individual investors, institutional investors and mutual fund
managers.
Design/methodology/approach – The authors have used the existing literatures from the various
authors, who have studied the disposition effect in either real market or the experimental market. This paper
includes literature over a period of 40 years, that is, Dyl, 1977, in the form of tax loss selling, to the most recent
paper, Surya et al. (2017). Some authors have used the PGR-PLR ratio for calculating the disposition effect in
their study. However, some authors have used t-test, ANNOVA, Correlation coefficient, Standard deviation,
Regression, etc., as a tool to find the presence of disposition effect.
Findings – The effect of disposition can be changed for different types of individual investors, institutional
investors and mutual funds. The individual investors are largely prone to the disposition effect and the
demographic variables like age, gender, experience, investor sophistication also impact the occurrence of the
disposition effect. On the other side, the institutional investors and mutual funds managers may or may not be
affected by the disposition effect.
Practical implications – The skilled understanding of the disposition effect will help the investors,
financial institutions and policy-makers to reduce the adverse effect of this bias in the stock market. This
paper contributes a detailed explanation of disposition effect and its impacts on the investors. The study of
disposition effect has been found to be insufficient in the context of Indian capital market.
Social implications – The investors and society at large can gains insights about causes and influences of
disposition effect which will be helpful to create sound investment decisions.
Originality/value – This paper has complied the 11 causes for the occurrence of disposition effect that are
found by the different authors. The paper also highlights the impact of the disposition effect in the decision-
making of various investors.
Keywords Prospect theory, Mental accounting, Institutional investors, PGR-PLR ratio
Paper type Literature review
1. Introduction
The twentieth century is an era of new theories, new technologies and new philosophies.
With the advancement in each area of science, technology, economics, sociology and
information processing, some innovative practices have been in trend. Financial theories
Qualitative Research in Financial
Markets
were also refined into progressive theories like Prospect theory, Dow theory, Short interest
Vol. 11 No. 1, 2019
pp. 2-21
© Emerald Publishing Limited
1755-4179
DOI 10.1108/QRFM-07-2018-0081 JEL classification – G40, G11
theory, Rational expectations theory, etc., to support the fluctuating trends in the stock Disposition
market. A requisite to reveal the mysteries underlying the irrational behavior of the effect
investors in the financial market was realized. Despite numerous efforts to link each
behavior of the investors’ to the rational and scientific theories of the traditional finance, it
failed miserably. This has led to the discovery of a new division of finance, known as
behavioral finance.
Behavioral Finance is an interdisciplinary area of finance that combine the principles of
psychology, sociology, economics and finance. It explains the impact of the diverse 3
emotional, social and psychological investors’ behavior on the financial decisions of the
investors. The principles of the theoretical finance are different from the theories of the
behavioral finance. While the classical finance theories focuses on the way individuals
should behave, the behavioral finance theories study the actual investors’ behavior. The
investors behave in an unexpected, sudden, non-unanimous and unpredictable manner.
Behavioral finance is currently undergoing a process of enlightening our minds about the
functioning of the financial markets and in what way the investors make decisions in the
financial market. It explains that the investors face various behavioral anomalies and biases
and do not always make rational decisions. So it works to bridge the gap between the actual
market behavior and the rational behavior, expected from the investors. Nevertheless, every
field of study is not complete in itself, and there is a vast scope of improvements in its
existing theories and behavioral finance is one of this.
A revolution for understanding the irrational behavior was originated by Kahneman and
Tversky (1979). They played a heroic role by explaining the prospect theory as an
alternative to the expected utility theory. According to the expected utility theory, the
investors’ selects between uncertain alternatives based on the utility derived from the final
wealth. The prospect theory explain that the investors weight the values in terms of gains
and losses with some reference point. The prospect theory facilitated other authors to
develop various theories of consumer choices and biases like nudge theory, endowment
effect, loss aversion, equity premium puzzle, etc. There are some benefits of investors’
irrational behavior; they maximize their profits using mental shortcuthe/sheuristics, that is,
anchoring, representativeness, etc.; it provides liquidity to the stock market; it accelerates
dispersion of information in the market and increased profitability to the companies, as they
can reap gains from the differences in the investor’s behavior. The irrational investor’s
behavior can be detrimental to some investors, as it can result in draining of investors’
profits because of the market crash, uncertainty in the markets, inappropriate losses because
of sudden market decline and contradiction of the concept of wealth maximization.
2. Literature review
Odean (1998) tested the disposition effect on 10,000 accounts of a large discount brokerage
house from a time period from 1987 to 1993. He was the pioneer author who explained the
formula for the disposition effect using the individual investors trading accounts in the US
markets. He found the ratio of PGR and PLR while taking into account the stock’s entire
portion of stock and ignoring the partial sales of the stock. He dismissing the intention of
rebalancing the portfolios. The ratio of PGR to PLR declines from 1.21 to 0.85 from January
to December. This points towards the tax-loss motivated selling in December. The author
computed the paper gains and paper losses by comparing the selling price of the stock
(either high or low) to its average selling price. If both high and low price of the day is
greater than its average purchase price, then it is considered as a paper gain. The paper loss
occurs if the purchase price is higher than the average high and low value of the stock. He
concluded that the investors are quick to realize gains as to the losses. The disposition effect
not only tells that people realize more gains than losses but they also indicate reference price
used to calculate the gains or losses. The study by Lakonishok and Smidt (1986) found that
the winners are sold and losers are held with the aim of rebalancing the portfolio. Indeed,
after removing the partial sales from the stock, the tax loss selling in December shows an
increase. Interestingly, the economic significance of disposition effect is very favorable for
the individual investors.
Kaustia (2004) studied the trading volume of US IPO over the period of 17 years, 1980-
1996. He tests the presence of disposition effect in view of the IPO trading volume. The
paper discusses the importance of the reference point to study the IPO trading in the stock
market. The author considers the total return (dividends, capital gains and stock splits)
QRFM since the IPO issue to be a significant reference price. The offer price of the IPO should be
11,1 seen as the reference point, such that when the IPO with a negative initial return exceeds the
offered trade the trading volume is significantly increased. It is evident that the disposition
effect is considered to be significant if it has an impact on the trading volume. The paper
also tells that not necessarily, the purchase price is the reference price for any IPO. The IPO's
whose prices start falling once it rises initially are prone to sell their shares immediately to
8 avoid losses from further fall in prices. The prices at this point are slightly above the offer
prices. But unluckily, if the prices fall below the offer prices, then the investors are faced
with the dilemma, as they neither want to face immediate losses now nor in the future. The
investors use stop losses to avoid this dilemma, as it sets the triggers level around the offer
price even if the trading that day is done below the offer price. Thus, when the prices of the
IPO’s are higher than the offer prices, the trading volume increases. The trading volume also
increases when the market price of the shares fall below the offer price for the very first time.
Thus, it does not make clear the occurrence of disposition effect.
It was interesting to note that when Chen et al. (2007) studied the existence of various
biases in the Chinese and US investors, they showed different behavior with regard to
different biases but were at par with the disposition effect. Furthermore, the inclination of
the disposition effect is more in the individual than as shown by institutional investors.
Authors have found that Chinese investors are more prone to disposition effect than the US
investors. This is an exploratory study identifying the multi-bias relationship among
various biases, that is, disposition effect, over confident and a representativeness bias. He
concluded that inexperienced investors are less prone to the behavioral biases. Moreover,
the inclination of the disposition effect is more in individual investors as compared to the
institutional investors. Thus, the investors in emerging countries like China exhibit more
behavioral biases than that of the investors in nations like USA.
Goetzmann and Massa (2008) studied the effect of disposition effect on the return, risk,
volatility and return of that asset. The interesting part is that when the investors show a
tendency of the disposition effect then the return, volume and volatility of the stock’s
decline. Barberis and Xiong (2009) used PGR–PLR ratio to predict that the disposition effect
is present only in some cases and fails when the PGR is less than the PLR. It does not exist
when the number of trading periods is low and the return of the risky returns is high.
Another cause for the disposition effect comes from the realization of utility. They described
that the investors compare the utility of the gains and losses and that they prefer the utility
of the gains to the utility of the losses. The belief in mean reversion behavior of the investors
is the major cause of the disposition effect. If the differences between PGR and PLR is
positive, then it shows a positive disposition effect. The disposition gives rise to the
momentum effect and other biases like overconfidence, the prospective trading volume can
lead to the disposition effect. Hur et al. (2010) stated that the reason for the stock market
anomaly is the existence of several biases and not only the risk preferences of the investors.
The stocks which have a greater participation of the individual investors have an edge
towards the momentum. Fairly, Linnainmaa (2010) showed that the use of limit order can
give an impression of the disposition effect’s limit. A limit order is an order placed by the
customer that directs the other party the right to sell or buy or buy a particular share if the
security reaches a certain price. Hur et al. (2010) have explained the market anomaly based
behavioral bias as the disposition effect. This, in turn, is a combination of the prospect
theory and mental accounting. The effect of the disposition effect to predict future stock has
a direct impact on the investor population who are exposed to these effects. The more the
presence of individual investors in the market, the more is the presence of disposition effect,
especially on hard to value stocks. The disposition is studied from the perspective of the
individual investors because of their behavioral bias. Kaustia (2010) finds that the prospect Disposition
theory can be used to predict disposition effect but along with certain assumptions. The effect
author finds that the likelihood of selling a stock is greatest at the point where the current
price and the purchase price of the stock is same. The willingness to sell a stock decreases
when the price either increases or decreases relative to the purchase price. The gain realized
by selling the stock in the range of 0-30 per cent will not result in a higher utility for selling
as compared to holding the stocks. The paper even rejects the idea of mean reversion in case
of losing stocks. When the capital losses are realized, the tendency to sell both 9
underperforming and outperforming stock is greatly reduced.
The goal system theory can be used to reduce the intensity of the disposition effect.
Cekauskas et al. (2011) calculated the PGR–PLR ratio on each security and then
aggregated the values to find the significance of the difference between the two ratios. If the
PGR ratio exceeds the PLR ratio, then it shows the existence of the disposition effect. This
method assumes the independence of each account and each transaction. The second
approach would be to compare the PLR and PGR for each investor, aggregating these values
and then to compare the values to find the existence of disposition effect. This method does
not assume the independence of each transaction across various accounts.
Kaustia (2011) found that the disposition effect may also have an impact on the changing
pattern of trading volume in the market and has an effect on the stock market under-
reactions which ultimately leads to a momentum in the share prices. The investors can lose
substantial part of their investment if they irrationally sell the stock and have to bear the
burden of the increased capital gain tax. He summarized the various causes of the
disposition effect in various types of investors and their possible implications such as
trading volume, asset pricing, real estate market and welfare costs. Chhabra and De (2012)
showed the records on the actual cost and the opportunity cost of selling and buying
securities. The disposition to sell stocks is higher than the disposition to repurchase
the stocks. Thus, the investor is more prone to losses from the disposition to sell than the
disposition to buy. Thus, the investors give more importance to the actual cost than to the
opportunity cost of selling or buying a particular security. Cici (2012) used PLR–PGR ratio
to find the extent to which the mutual fund managers are exposed to the disposition effect.
The funds which are prone to the disposition effect realize more gains than loses. This
difference is addressed as the disposition spread. Jiao (2013) found the mean reversion
behavior of the stock market as the cause of these disposition effect. Several theories had
tried to explain the disposition effect with the help of rationalizing the neo-classical theories
of investment decisions. The disposition effect can be explained with the help of prospect
theory through the assumption of loss aversion and asymmetric risk attitudes.
Woo and Pollack (2014) found that yet another way of finding the disposition effect is the
capital gains overhung. This is the difference between the current price of the stock and
the price at which those shares were purchased by the shareholders currently holding them.
The disposition effect might be a reason for the momentum in the stock (a situation that
the current prices will continue to exist in the market). The disposition effect is, in fact, is the
result of the mental accounting and the prospect theory. It means that the investors value
the gains and losses with the regard to the average price of the shares. Capital gain
overhung is the difference between the current prices from the average price that the
investor expects as a function of the current price of the share in the market. This average
price is the weighted average of the price of securities held at the beginning of the purchase.
Frino et al. (2015) studied how the multi-culture and their ethnicity can impact the trading
behaviour of various categories of investors. The society wherein multi-culture is
intertwined, studying the Chinese investors in those Australian market was the primary
QRFM motivation. The disposition effect is prevalent in some categories of investors like women,
11,1 aged people investors with undiversified portfolio, investors investing in stocks with a lower
value, etc. Aren et al. (2016) have evaluated published institutional investors research in
recognized journals. He concluded that the important determinants of disposition effect are
the investor experience and overconfidence. Overall, institutional investors are less prone to
the deposition effect.
10 Richards et al. (2011) found that the stop losses can be used to reduce the impact of
disposition effect. This is done in two ways, one through ordinary stop loss and the second
with the tracking stop loss. The former reduces the reluctance to sell losses and the latter
one is to reduce the eagerness to sell gains. The investor sophistication like the knowledge
about the various investment alternatives as well as experience gained in the financial
market also reduces the disposition effect.
Toma (2015) also found that the investors are prone to disposition effect at the individual
level and not at the portfolio level. This shows the application of both the mental accounting
and prospect theory. Bodnaruk and Simonov (2015) studied the existence of disposition
effect in the mutual fund managers by comparing the difference between the PGRit and
PLRit. PGRit is the ratio of the winning stocks with realized gains to the total number of
winning stocks. PLRit is the ratio of the losing stocks with realized loses to the total number
of losing stocks. This value is compared with the Fama-French World Index. The stock is
considered as a winning stock if it gives a return higher than this index and a losing stock if
the value of Fama-French World Index is higher than the value of the stock. Li et al. (2016)
found that apart from the cognitive bias, another significant factor which affects the
disposition effect in the mutual fund investors is the social norms. It says that the social
bonds of the individual have a lasting impact on the investors, as they are motivated by a
higher performance. The increased fund performance sensitivity ultimately make the
investors to sell the winners and to hold the losers. The lower fund performance sensitivity
arises because investors do not bother much about the poor performance of the funds and
they are more focused to explore more the unexplored funds. The social trust is an
interesting fact that can be focused to study disposition effect. A one percent increase in the
social trust can have an impact on the mutual fund flow sensitivity up to a level of 59
per cent. The trust induced flow may reduce the disposition effect. Another interesting
conclusion is that the immigrants to the other countries bring with them some sort of social
trust which is enough to induce the disposition effect. It adds to the fact the effect of this
culture-related bias may have a different impact on the loss and gainful outcomes. These all
characteristic of disposition effect is more present in the individual investors than in the
institutional investors. The country-specific social norms have a different impact on the
trading behavior of investors.
Surya et al. (2017) explained the disposition effect with the help of the regulatory focus
theory. This theory categorizes the investors between the prevention group and promotion
group. The disposition effect can be explained from the perspective of the prospect theory.
Some authors are of the view point that it is not so that the prospect theory cannot explain
the disposition effect. But the reason is that the prospect theory cannot be used to explain
the loss aversion in the initial investment. The regret theory can better explain the
disposition effect in the investors. They can make an informed decision when they have the
information about the post decisions options. The disposition effect arises because investors
have an urge to avoid the feeling of regret in the decision-making.
The disposition effect has been studied across various categories of investors by
different authors, mutual funds by Scherbina and Jin (2005), Xu (2007); Ammann et al.
(2011); Li et al. (2016); Cici (2010), individual investors by Feng and Seasholes (2005);
Barberis and Xiong (2009); Hur et al. (2010); Cekauskas et al. (2011); Jiao (2013); Disposition
household investors by Calvet et al. (2009); Kaustia (2011); Nygaard (2011); Firth (2015), effect
institutional investors by Teo and O’Connell (2003), Annaert et al. (2008), O’Connell and
Teo (2009); Croonenbroeck and Matkovskyy (2013) and Lucchesi et al. (2015). Some
authors, that is, Odean (1998); Zhuel (2001); Da Costa et al. (2008) and Jiao (2013), believe
that the occurrence of the disposition effect is because of a belief of the investors
regarding the mean-reverting behavior of the financial markets. The participants
having the basic knowledge of statistics sell winners but hold only a few losers. 11
4. Research methodology
4.1 Research objectives
The objectives of this research are as follows:
to understand the disposition effect and its impacts on the investors’ decisions;
to highlight the causes of the disposition effect in the experimental situations and in
the real market;
to identify the disposition effect in various types of investors like individual
investors, institutional investors and mutual funds; we recommend them to draft
their own strategies and techniques to reduce the velocity of disposition effect, etc;
to identify the impact of cognitive biases, that is, mental accounting, overconfidence,
regret aversion, etc., with the disposition effect;
to indicate the impact of disposition effect on the volatility, return and risk of
financial markets and IPOs;
to study the Proportion of Gains Realized (PGR) and Proportion of Loss Realized
(PLR) ratio for calculating the disposition effect;
to compile the literatures of various authors in respect of growing theories of
disposition effect;
to sum up some impact of disposition effect on the investor's choices like tax
planning, future sale and purchase of stocks, diversification of portfolio, etc.; and
to add to the existing knowledge of the stock brokers, investment advisors,
investment managers, portfolio managers about the circumstances under which
their clients can be exposed to the disposition effect.
QRFM 4.2 Research tools and techniques
11,1 This paper includes the literature on disposition effect obtained from Emerald, EBSCOhost,
SSRN and Google Scholar. We include the theories, models, arguments, reasons, etc., given
by different authors’ overtime to establish the existence of disposition effect. This study
includes the very first literature on disposition effect given by Dyl (1977) to the most recent
paper by Surya et al. (2017).
14 Most of the study conducted to find the disposition effect is carried out using either
experimental studies or using the secondary data. Standard deviation is used by the
following authors, that is, Barberis and Xiong (2009); Hur et al. (2010); Kadous et al. (2014); Li
et al. (2016) and Heimer et al. (2016). Mean, median is applied by Magnani (2013), Kadous
et al. (2014); Heimer et al. (2016) and Li et al. (2016) and few authors have tested survival
analysis methods to identify the occurrence of disposition effect, that is, Feng and Seasholes
(2005); Guler (2007); Chen et al. (2007); Richards et al. (2011); Chhabra and De (2012); Chen
et al. (2007) used survival analysis to test the duration of holding stocks by the investors to
check the disposition effect. Survival analysis is easy to interpret and the data are also found
on those days when the investor does not buy or sell out any securities.
The coefficient of correlation is used to check the relationship between independent
variables and the disposition effect, that is, Cekauskas et al. (2011); Woo and Pollack (2014)
and Li et al. (2016). Kolmogorov–Smirnov tests is applied by the several authors, that is,
Fischbacher et al. (2017), Weber and Camerer (1998), to compare probability distribution
across subjects in an experimental study; Jiao (2013) used it to find the belief in mean
reversion is different in case of either gains or losses. However, Regression is used by Feng
and Seasholes (2005); Hur et al. (2010); Richards et al. (2011); Jiao (2013) and Heimer (2016).
Two-way ANOVA is used by Aspara and Hoffmann (2015). Linear regression is applied by
Woo and Pollack (2014).
Logit regression is used by the several authors, that is, Feng and Seasholes (2005);
Lucchesi et al. (2015) and Cici (2010) to find different selling propensities of the investors in
response to the gains and losses. VAR coefficient is applied by Duan and Shou (2008) and
Liu and Chen (2008). The t-test is used by Weber and Camerer (1998) and Duan and Shou
(2008). Chi-square test is used by Kadous et al. (2014), who performed this test to know the
association between investor characteristics like investor status, gender and price change. Z
test is applied by Da Costa et al. (2008) and Feng and Seasholes (2005). Wilcoxon z-stat is
used by Kadous et al. (2014).
Realised Gains
PGR :
ðRealised gains þ Paper GainsÞ
Realised Loss
PLR :
ðRealised Loss þ Paper LossÞ
Realized gains = These are the realized profit when the shares are actually sold for profit.
Realized Loss = The actual losses incurred on selling the shares at a loss.
Paper Gains = The gains which the investor would have realized if they would have
sold the shares that increase in value.
Paper losses = The unrealized loss that the investors may have recognized if the stocks Disposition
would have been sold at a loss. The disposition effect occurs when the effect
PGR > PLR. The worth of finding the values of PGR and PLR is
increased when the value is computed across several accounts relative to
each other rather than measuring them individually.
6. Conclusions
It is concluded that the disposition effect is caused because of a variety of factors like prospect
theory, mental accounting, overconfidence, regret aversion, tax-motivated selling, etc. Different
investors are faced with different amount of disposition effect based on their respective
demographic characteristics. By attaining a high level of the understanding of the financial
markets, the investors can acquaint themselves with the probable effects of the financial
decisions and reduce it appropriately. This requires a conscious decision both on the part of the
individual investors, the institutional investors and the mutual funds. The actual market
Figure 1.
Causes of disposition
effect studied by
different authors
Figure 2.
Various impacts of
disposition effect
given by different
authors
conditions are far different from the ideal market conditions. A reduction in the disposition Disposition
effect can potentially reduce the uneven changes in the equity prices and can enhance the effect
efficiency of the stock market. Though, only seeking knowledge of the disposition effect alone
cannot reduce its effects completely, but it can help to reduce its potential effects which might
arise in the future. This is a rapid indication for all the investors to be well-coordinated and
balanced before investing in any security. The requisite consideration of the disposition effect
can be put to use while taking investment decisions in the stock markets. The solutions to the
behavioral puzzles can be found out properly if the changes in the stock markets are viewed 17
from a wider perspective. This could desirably have positive implications in the long run.
7. Future implications
The society and the investors at large are highly impacted by the disposition effect. The
investors, being an imperative part of the society, are highly influenced by the social
norms, social interactions, social groups and social belongingness which ultimately
increases their inclination towards the disposition effect. In light of these factors, the
financial advisors and the issuing companies should identify the various characteristics
of the investors before offering any security in the stock market. The differences in
gender, relative differences among investors, the exposure to the international markets,
extent of the domestic investor’s participation in the international markets, the long-term
and short-term objectives of the investors, the occurrence of behavioural biases like
overconfidence, mental accounting, etc., are some of the important determinants that can
affect the impact of the disposition effect among investors. It is possible that the
securities that the investors sell might continue to increase in value which may reduce
their gains. Similarly, the losing stocks which they hold continue to fall in value leading
to subsequent losses. The study becomes extensively for teaching purposes and aiding
academia, public policy and research for more comprehensive study of the disposition
effect. The paper also summarizes the various methodology which has been given by
various authors to study the existence of disposition effect. The various theories evolved
over the period of time helps to get a clear picture of the occurrence of disposition effect.
The issuers of the securities and the companies can predict the risk and return behaviour
of the investors before issuing any security in the stock market. This helps to predict the
response of the investors in regard to the issue.
The researchers who want to study and understand about the disposition effect can refer to
this paper, as it gives a comprehensive background of the existence of disposition effect. The
investors become well versed with the various reasons that increases the disposition effect.
This is essential for making strategies about the stock return and investing pattern in the long
run. To the best of our knowledge, this paper is the first in itself that has compiled the above-
mentioned 11 reasons for the occurrence of disposition effect. It gives a vivid picture to the
reader to enhance his understanding of the theories of disposition effect and, also, some
alternative reasons which question the existence of disposition effect in the actual stock market.
The other behavioral biases, that is, herding, house money effect, anchoring and gambler’s
fallacy causing the disposition effect, can be identified apart from the overconfidence, regret
aversion, etc. The relative comparisons of the disposition effect across developed and
developing countries can give an idea about the rapidity of its occurrence in either of the two
economies. The study can be conducted to enhance the knowledge of the demographic
variables, that is, education, income, profession, etc., causing the disposition effect. This study
can help to focus on the identified variables if they have the propensity to reduce disposition
effect and to eliminate its occurrence if they are likely to enhance the tendency of the disposition
effect. Further studies can be conducted by taking the actual behavior of the investors as the
QRFM dependent variable to measure the disposition effect. A significant study is desired in the
11,1 developing countries like India, as their economy is prone to the misfortunes arising out of the
impacts, that is, volatility in the stock market, mispricing of the securities, etc., of
the disposition effect. There is dearth of findings of the entrapment research and its impact on
the disposition effect. This area can be highly focused.
18 References
Annaert, J., Heyman, D., Vanmaele, M. and Van Osselaer, S. (2008), “Disposition bias and
overconfidence in institutional trades”, unpublished paper presented at the European Financial
Management Symposium 2008.
Aren, S., Aydemir, S.D. and Sehitoglu, Y. (2016), “Behavioral biases on institutional investors: a
literature review”, Kybernetes, Vol. 45 No. 10, pp. 1668-1684.
Aspara, J. and Hoffmann, A.O.I. (2015), “Cut your losses and let your profits run: how shifting
feelings of personal responsibility reverses the disposition effect”, Journal of Behavioral
and Experimental Finance, Vol. 8, pp. 18-24, available at: https://doi.org/10.1016/j.
jbef.2015.10.002
Barber, B.M., Lee, Y., Liu, Y. and Odean, T. (2011), “The cross-section of speculator skill: evidence from
Taiwan”, available at: http://ssrn.com/abstract=529063
Barberis, N. and Xiong, W. (2009), “What drives the disposition effect? An analysis of a long-standing
preference-based explanation”, Journal of Finance, Vol. 64 No. 2, pp. 751-784.
Ben-David, I. and Doukas, J. (2006), “Overconfidence, trading volume, and the disposition effect:
evidence from the trades of institutional investors”, Working Paper, University of Chicago and
Old Dominion University.
Ben-David, I. and Hirshleifer, D. (2012), “Are investors really reluctant to realize their losses? Trading
responses to past returns and the disposition effect”, Review of Financial Studies, Vol. 25 No. 8,
pp. 2485-2532.
Bodnaruk, A. and Simonov, A. (2015), “Do financial experts make better investment decisions?”,
Journal of Financial Intermediation, Vol. 24 No. 4, pp. 514-536, available at: https://doi.org/
10.1016/j.jfi.2014.09.001
Boolell-Gunesh, S., Broihanne, M. and Merli, M. (2009), “Disposition effect, investor sophistication and
taxes: some French specificities”, Finance, Vol. 30 No. 1, pp. 51-78, available at: www.cairn.info/
revue-finance-2009-1-page-51.htm
Brockner, J. (1992), “The escalation of commitment to a failing course of action: toward theoretical
progress”, Academy of Management Review, Vol. 17 No. 1, pp. 39-61.
Calvet, L.E., Campbell, J.Y. and Sodini, P. (2009), Measuring the Financial Sophistication of Households
(No. w14699), National Bureau of Economic Research.
Cekauskas, K., Liatukas, V., Verlaine, M. and Putnin š, T. (2011), “Behavioural biases of the
disposition effect and overconfidence and their impact on the estonian stock market”,
Bachelor Thesis.
Chen, G., Kim, K.A., Nofsinger, J.R. and Rui, O.M. (2007), “Trading performance, disposition effect,
overconfidence, representativeness bias, and experience of emerging market investors”, Journal
of Behavioral Decision Making, Vol. 20 No. 4, pp. 425-451, available at: https://doi.org/10.1002/
bdm.561
Chhabra, R. and De, S. (2012), “Are out-of-pocket costs over weighted relative to opportunity costs? A
disposition effect based investigation”, SSRN Electronic Journal, available at: https://ssrn.com/
abstract=2022986
Cici, G. (2010), The Relation of the Disposition Effect to Mutual Fund Trades and Performance, available
at: https://ssrn.com/abstract=645841 or http://dx.doi.org/10.2139/ssrn.645841
Cici, G. (2012), “The prevalence of the disposition effect in mutual funds’ trades”, Journal of Financial Disposition
and Quantitative Analysis, Vol. 47 No. 4, pp. 795-820.
effect
Constantinide, G. (1984), “Optimal stock trading with personal taxes: implications for prices and the
abnormal January returns”, Journal of Financial Economics, Vol. 13 No. 1, pp. 65-89.
Croonenbroeck, C. and Matkovskyy, R. (2013), “Is the market held by institutional investors? The
disposition effect revisited (no. 338)”, Discussion Paper, European University Viadrina,
Department of Business Administration and Economics.
Da Costa, N., Jr, Mineto, C. and Da Silva, S. (2008), “Disposition effect and gender”, Applied Economics
19
Letters, Vol. 15 No. 6, pp. 411-416.
Duan, L. and Shou, C. (2008), “Disposition effects and investor overconfidence: evidence from trading
volume in China stock market”, International Conference on Wireless Communications,
Networking and Mobile Computing, WiCOM 2008, I, pp. 6-9, available at: https://doi.org/
10.1109/WiCom.2008.2325
Dyl, E.A. (1977), “Capital gains taxation and year-end stock market behaviour”, The Journal of Finance,
Vol. 32 No. 1, pp. 165-175, doi: https://doi.org/10.1111/j.1540-6261.1977.tb03250.x.
Feng, L. and Seasholes, M.S. (2005), “Do investor sophistication and trading experience eliminate
behavioral biases in financial markets?”, Review of Finance, Vol. 9 No. 3, pp. 305-351, available
at: https://doi.org/10.1007/s10679-005-2262-0
Firth, C. (2015), “The disposition effect in the absence of taxes”, Economics Letters, Vol. 136,
pp. 55-58.
Fischbacher, U., Hoffmann, G. and Schudy, S. (2017), “The causal effect of stop-loss and take-gain
orders on the disposition effect”, The Review of Financial Studies, Vol. 30 No. 6, pp. 2110-2129,
available at: https://doi.org/10.1093/rfs/hhx016
Frino, A., Lepone, G. and Wright, D. (2015), “Investor characteristics and the disposition effect”, Pacific-
Basin Finance Journal, Vol. 31, pp. 1-12.
Goetzmann, W.N. and Massa, M. (2008), “Disposition matters: volume, volatility, and price impact of a
behavioral bias”, The Journal of Trading, Vol. 3 No. 2, pp. 68-90.
Grinblatt, M. and Han, B. (2005), “Prospect theory, mental accounting, and momentum”, Journal of Financial
Economics, Vol. 78 No. 2, pp. 311-339, available at: https://doi.org/10.1016/j.jfineco.2004.10.006
Grinblatt, M. and Keloharju, M. (2004), “Tax-loss trading and wash sales”, Journal of Financial Economics,
Vol. 71 No. 1, pp. 51-76, available at: https://doi.org/10.1016/S0304-405X(03)00180-6
Heimer, R.Z. (2016), “Peer pressure: social interaction and the disposition effect”, The Review of
Financial Studies, Vol. 29 No. 11, pp. 3177-3209, available at: https://doi.org/10.1093/rfs/hhw063
Heimer, R.Z. Kaustia, M. Korniotis, G. Kumar, A. Koch, P. and Nagel, S. (2016), “Peer pressure:
social interaction and the disposition effect”, No. 216, available at: https://doi.org/10.1093/
rfs/hhw063
Hur, J., Pritamani, M. and Sharma, V. (2010), “Momentum and the disposition effect: the role of
individual investors”, Financial Management, Vol. 39 No. 3, pp. 1155-1176, available at: https://
doi.org/10.1111/j.1755-053X.2010.01107.x
Ingersoll, J.E. and Jin, L.J. ( 2013), “Realization utility with reference-dependent preferences”, The Review of
Financial Studies, Vol. 26 No. 3, pp. 723-767, available at: https://doi.org/10.1093/rfs/hhs116
Jiao, B.P. (2013), “Belief in mean reversion and the disposition effect: an experimental test”, Vol. 6165,
pp. 1-61.
Kadous, K., Tayler, W.B., Thayer, J.M. and Young, D. (2014), “Individual characteristics and the
disposition effect: the opposing effects of confidence and self-regard”, Journal of Behavioral
Finance, Vol. 15 No. 3, pp. 235-250, available at: https://doi.org/10.1080/15427560.2014.939748
Kahneman, D. and Tversky, A. (1979), “Prospect theory: an analysis of decision under risk”,
Econometrica, Vol. 47 No. 2, pp. 263-291.
QRFM Kaustia, M. (2004), “Market-wide impact of the disposition effect: evidence from IPO trading volume”,
Journal of Financial Markets, Vol. 7 No. 2, pp. 207-235, available at: https://doi.org/10.1016/j.
11,1 finmar.2003.11.002
Kaustia, M. (2010), “Prospect theory and the disposition effect”, Journal of Financial and Quantitative
Analysis, Vol. 45 No. 3, pp. 791-812.
Kaustia, M. (2011), “Disposition effect. Behavioral finance: investors, corporations, and markets”,
pp. 169-189, available at: https://doi.org/10.1002/9781118258415.ch10
20 Lakonishok, J. and Smidt, S. (1986), “Volume for winners and losers: taxation and other motives for
stock trading”, Journal of Finance, Vol. 41 No. 4, pp. 951-974.
Lehenkari, M. (2009), Essays on the Effects of Gains and Losses on the Trading Behavior of Individual
Investors in the Finnish Stock Market, University of Oulu.
Li, J., Massa, M. and Zhang, H. (2016), “Culture vs. Bias: can social trust mitigate the disposition effect?”,
C.E.P.R. Discussion Papers, available at: https://doi.org/10.2139/ssrn.2865701
Linnainmaa, J.T. (2010), “Do limit orders alter inferences about investor performance and behavior?”,
The Journal of Finance, Vol. 65 No. 4, pp. 1473-1506, available at: https://doi.org/10.1111/j.1540-
6261.2010.01576.x
Liu, D. and Chen, S. (2008), “Disposition effects and investor overconfidence: evidence from trading
volume in China stock market”, 4th International Conference on Wireless Communications,
Networking and Mobile Computing, WiCOM'08, IEEE, pp. 1-4.
Lucchesi, E.P., Yoshinaga, c.E. and Castro Junior, f. H. F.D. (2015), “Disposition effect among Brazilian
equity fund managers”, Revista de Administração de Empresas, Vol. 55 No. 1, pp. 26-37.
Magnani, J. (2013), “The disposition effect and realization preferences: a direct test”, Working Paper,
available at: https://129.210.6.6/business/economics/upload/JMagnani_disposition-110613.pdf
Magnani, J. (2014), “The disposition effect and realization preferences: a direct test”, Center for
Analytical Finance University of California, Santa Cruz, Working Paper No. 9.
Meng, J. and Weng, X. (2017), “Can prospect theory explain the disposition effect? A new perspective on
reference points”, Management Science.
Muermann, A. and Volkman, J.M. (2006), “Regret, pride and the disposition effect”, Working Paper,
pp. 1-26, available at: https://doi.org/10.2139/ssrn.930675
Nygaard, K. (2011), “The disposition effect and momentum: evidence from Norwegian household
investors”, available at: https://ssrn.com/abstract=2145290
O’Connell, P.G. and Teo, M. (2009), “Institutional investors, past performance, and dynamic loss
aversion”, Journal of Financial and Quantitative Analysis, Vol. 44 No. 1, pp. 155-188.
Odean, T. (1998), “Are investors reluctant to realize their losses? Published paper”, Journal of Finance,
Vol. 53 No. 5, pp. 1775-1798, available at: https://doi.org/10.1111/0022-1082.00072
Parveen, S. (2016), “Exploring disposition effect and overconfidence in Pakistani investors in KSE listed
sectors”, Research Journal of Finance and Accounting, Vol. 7 No. 7, pp. 72-85.
Richards, D., Rutterford, J. and Fenton-O’Creevy, M. (2011), “Do stop losses work? The disposition
effect, stop losses and investor demographics”, The Open University Business School Working
Paper.
Scherbina, A.D. and Jin, L. (2005), “Change is good or the disposition effect among mutual fund
managers”, AFA 2006 Boston Meetings Paper, 25 February 2005, available at: https://ssrn.com/
abstract=687401 or http://dx.doi.org/10.2139/ssrn.687401
Shefrin, H. and Statman, M. (1985), “The disposition to sell winners too early and ride losers too long,
theory and evidence”, Journal of Finance, Vol. 40 No. 3, pp. 777-790.
Staw, B.M. (1981), “The escalation of commitment to a course of action”, Academy of Management
Review, Vol. 6 No. 4, pp. 577-587.
Surya, I.M., Sudirman, N. and Irwanto, A. (2017), Selected Papers from the Asia-Pacific Conference on
Economics & Finance (APEF 2016), (Apef 2016), pp. 19-30, available at: https://doi.org/10.1007/
978-981-10-3566-1
Tenberge, M. (2009), Can Regret and Pride Explain the Disposition Effect?, Konstanzer- Online Disposition
Publication System (KOPS), pp. 1-31, available at: http://nbn-resolving.de/urn:nbn:de:bsz:352-
opus-122897 effect
Teo, M. and O’Connell, P.G.J. (2003), Prospect Theory and Institutional Investors, available at: https://
ssrn.com/abstract=457741 or http://dx.doi.org/10.2139/ssrn.457741
Thaler, R. (1985), “Mental accounting and consumer choice”, Marketing Science, Vol. 4 No. 3, pp. 199-214.
Thaler, R.H. (1999), “Mental accounting matters”, Journal of Behavioral Decision Making, Vol. 12 No. 3,
pp. 183-206, available at: https://doi.org/10.1002/(SICI)1099-0771(199909)12:3<183::AID- 21
BDM318>3.0.CO;2-F
Toma, F.-M. (2015), “Behavioral biases of the investment decisions of Romanian investorson the
Bucharest stock exchange”, Procedia Economics and Finance, Vol. 32 No. 15, pp. 200-207,
available at: https://doi.org/10.1016/S2212-5671(15)01383-0
Weber, M. and Camerer, C.F. (1998), “The disposition effect in securities trading: an experimental
analysis”, Journal of Economic Behavior and Organization, Vol. 33 No. 2, pp. 167-184, available
at: https://doi.org/10.1016/S0167-2681(97)00089-9
Woo, J. and Pollack, I. (2014), “Economic and statistical significance of disposition effect and
momentum in the US stock market”, Working Paper, pp. 1-28.
Xu, Z. (2007), “Selling winners, holding losers: effecton mutual fund performance and flows”,
Dissertation, Faculty of the Virginia Polytechnic Institute and State University.
Zhang, L. and Baumeister, R.F. (2006), “Your money or your self-esteem: threatened egotism promotes
costly entrapment in losing endeavors”, Personality & Social Psychology Bulletin, Vol. 32 No. 7,
pp. 881-893.
Zuchel, H. (2001), “What drives the disposition effect? Sonderforschungsbereich, 504 publications”,
available at: http://ideas.repec.org/p/xrs/sfbmaa/01-39.html
Further reading
Abdallah, S. and Hilu, K. (2015), “Exploring determinants to explain aspects of individual investors’
financial behaviour”, Australasian Accounting, Business and Finance Journal, Vol. 9 No. 2,
pp. 4-22, available at: https://doi.org/10.14453/aabfj.v9i2.2
A Portfolio Rebalancing Theory of Disposition Effect (2019), available at: http://apps.olin.wustl.edu/
faculty/liuh/Papers/Disposition-01-27-2016.pdf
De, S., Gondhi, N.R. and Sarkar, S. (2011), “Behavioral biases, investor performance, and wealth
transfers between investor groups * behavioral biases, investor performance, and wealth
transfers between investor groups”, Exchange Organizational Behavior Teaching Journal.
Web references
Ebscohost: http://web.a.ebscohost.com/ehost/search/selectdb?vid=0&sid=d63770db-6344-470d-ac89-
cd3df39f62b1%40sessionmgr4007
Emerald Insight www.emeraldinsight.com/
SSRN: www.ssrn.com/en/
www.Googlescholar.com
Corresponding author
Rohit Bansal can be contacted at: [email protected]
For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: [email protected]