I test the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon, by analyzing trading records for 10,000 accounts at a large discount brokerage house. These investors demonstrate a strong preference for realizing winners rather than losers. Their behavior does not appear to be motivated by a desire to rebalance portfolios, or to avoid the higher trading costs of low priced stocks. Nor is it justified by subsequent portfolio performance. For taxable investments, it is suboptimal and leads to lower after-tax returns. Tax-motivated selling is most evident in December. THE TENDENCY TO HOLD LOSERS too long and sell winners too soon has been labeled the disposition effect by Shefrin and Statman ~1985!. For taxable investments the disposition effect predicts that people will behave quite differently than they would if they paid attention to tax consequences. To test the disposition effect, I obtained the trading records from 1987 through 1993 for 10,000 accounts at a large discount brokerage house. An analysis of these

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth. The investor’s chief problem—and even his worst enemy—is likely to be himself. Benjamin Graham In 1996, approximately 47 percent of equity investments in the United States were held directly by households, 23 percent by pension funds, and 14 percent by mutual funds ~Securities Industry Fact Book, 1997!. Financial economists have extensively analyzed the return performance of equities managed by mutual funds. There is also a fair amount of research on the performance of equities managed by pension funds. Unfortunately, there is little research on the return performance of equities held directly by households, despite their large ownership of equities.

We examine changes in the stock trading behavior and investment performance of 1,607 investors who switch from phone based to online trading during the period 1992 to 1995. We document that young men who are active traders with high incomes and a preference for investing in small growth stocks with high market risk are more likely to switch to online trading. We also find that those who switch to online trading experience unusually strong performance prior to going online, beating the market by more than two percent annually. After going online, they trade more actively, more speculatively, and less profitably than before-- lagging the market by more than three percent annually. A rational response to reductions in market frictions (lower trading costs, improved execution speed, and greater ease of access) does not explain these findings. The increase in trading and reduction in performance of online investors can be explained by overconfidence augmented by self-attribution bias, the illusion of knowledge, and the illusion of control.

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. 1.

Individual investor trading results in systematic and economically large losses. Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individuals suffers an annual performance penalty of 3.8 percentage points. Individual investor losses are equivalent to 2.2 % of Taiwan’s gross domestic product or 2.8% of the total personal income. Virtually all individual trading losses can be traced to their aggressive orders. In contrast, institutions enjoy an annual performance boost of 1.5 percentage points, and both the aggressive and passive trades of institutions are profitable. Foreign institutions garner nearly half of institutional profits. (JEL G11, G14, G15, H31) Financial advisers recommend that individual investors refrain from frequent trading. Investors should buy and hold diversified portfolios, such as low-cost mutual funds. If skill contributes to investment returns, individual investors are obviously at a disadvantage when trading against professionals. What is less clear is just how much do individual investors lose by trading? In this paper, we document that trading in financial markets leads to economically large losses for individual investors and virtually all of the losses of individual investors

We examine detailed daily Australian Stock Exchange share registry data for investors in IPO and index stocks between 1995 and 2000 and find that the “disposition effect”, investors’ reluctance to crystallise losses and relative eagerness to realise gains, is pervasive across investor classes. However, traders instigating larger investments tend to be affected less by the disposition bias. Our novel findings include that (a) the disposition effect ameliorates over time, being undetectable from around 200 trading days after purchase, (b) the “house money ” effect tempers the disposition effect, (c) shareholder loyalty schemes also partially offset investors ’ relative preference for selling winning stocks and (d) the reversal of the disposition effect in June (the last month of the Australian tax year) does not occur among investors unable to take advantage of tax shields. In line with earlier research, our results support a tax-related explanation for the June effect rather than window dressing or momentum explanations. Finally, we confirm Odean’s (1998) finding that the disposition effect is not driven by diversification motives, or by higher transaction costs associated with lower priced stocks.

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that traded most earned an annual return of 11.4 percent, while the market returned 17.9 percent. The average household earned an annual return of 16.4 percent, tilted its common stock investment toward high-beta, small, value stocks, and turned over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth. The investor’s chief problem-- and even his worst enemy--is likely to be himself. Benjamin Graham In 1996, approximately 47 percent of equity investments in the U.S. were held directly by households, 23 percent by pension funds, and 14 percent by mutual funds (Security Industry Fact Book, 1997). Financial economists have extensively analyzed the return performance of equities managed by mutual funds. There is also a fair amount of

Trading volume on the world’s markets seems high, perhaps higher than can be explained by models of rational markets. For example, the average annual turnover rate on the New York Stock Exchange (NYSE) is currently greater than 75 percent 1 and the daily trading volume of foreign-exchange transactions in all currencies (including forwards, swaps, and spot transactions) is roughly one-quarter of the total annual world trade and investment flow (James Dow and Gary Gorton, 1997). While this level of trade may seem disproportionate to investors’ rebalancing and hedging needs, we lack economic models that predict what trading volume in these market should be. In theoretical models trading volume ranges from zero (e.g., in rational expectation models without noise) to infinite (e.g., when traders dynamically hedge in the absence of trading costs). But without a model which predicts what trading volume

country. It was founded in 1969 through a grant from Oppenheimer & Company in honor of its late partner, Rodney L. White. The Center receives support from its endowment and from annual contributions from its Members. The Center sponsors a wide range of financial research. It publishes a working paper series and a reprint series. It holds an annual seminar, which for the last several years has focused on household financial decision making. The Members of the Center gain the opportunity to participate in innovative research to break new ground in the field of finance. Through their membership, they also gain access to the Wharton School’s faculty

examine detailed daily Australian Stock Exchange share registry data for investors in IPO and index stocks between 1995 and 2000 and find that the “disposition effect”, investors ’ reluctance to crystallise losses and relative eagerness to realise gains, is pervasive across investor classes, however, traders instigating larger investments tend to be less, if not entirely unaffected by the disposition bias. Our novel findings include (a) that the disposition effect ameliorates over time, being undetectable in our tests from around 200 trading days after purchase, (b) the “house money ” effect tempers the disposition effect, (c) shareholder loyalty schemes also partially off-set investors ’ relative preference for selling winning stocks, and (d) the reversal of the disposition effect in June (the last month of the fiscal year) does not occur among investors unable to take advantage of tax shields. In line with earlier research, our results support a tax related explanation for the June effect rather than window dressing or momentum effect explanations. Finally, our tests confirm Odean’s (1998) finding that the disposition effect is not driven by diversification motives, or to avoid higher transaction costs associated with lower priced stocks.