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

The field of modern financial economics assumes that people behave with extreme rationality, but they do not. Furthermore, people’s deviations from rationality are often systematic. Behavioral finance relaxes the traditional assumptions of financial economics by incorporating these observable, systematic, and very human departures from rationality into standard models of financial markets. We highlight two common mistakes investors make: excessive trading and the tendency to disproportionately hold on to losing investments while selling winners. We argue that these systematic biases have their origins in human psychology. The tendency for human beings to be overconfident causes the first bias in investors, and the human desire to avoid regret prompts the second. There is one important caveat to the notion that we live in a new economy, and that is human psychology... which appears essentially immutable.

This article uses transactions data for all NYSE/AMEX stocks in the period 1983–2002 to study how investors trade in Jegadeesh and Titman’s (1993) momentum portfolios. Among small trades, there is an extremely sluggish reaction to the past returns. For instance, an initial small-trade buying pressure exists for loser stocks, and it gradually converts into an intense selling pressure over the following year. The results are consistent with initial underreaction followed by delayed reaction among small traders. Moreover, small-trade imbalances during the formation period significantly affect momentum returns, suggesting that underreaction among small traders contributes to the momentum effect. Large traders, by contrast, show no evidence of underreaction, and largetrade imbalances have little impact on subsequent returns. Overall, the results suggest that momentum could partly be driven by the behavior of small traders.

What, apart from taxation incentives and information arrival, explains inter-temporal change in market liquidity? We address this question from the perspective of prospect theory, which proposes that individuals are risk averse in the domain of gains and risk seeking in losses. We find that Australian investors prefer to realise gains earlier than losses and that in so doing their behaviour is more consistent with prospect theory than with alternative explanations arising from the taxation regime or from the traditional paradigm of rational choice.

Symposium. All errors are our own. Tax-Loss Selling and the January Effect:

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

This paper investigates the disposition effect of individual investors from a data set of 53,680 accounts covering 10,883,473 transaction records. The results show that investors in Taiwan exhibit disposition effect to an extent more than the U.S. investors. The results of logistic regression and tobit regression show that aged female is more inclined to asymmetrically deal with their winners than losers. In contrast, the margin-purchase or short-selling investor is less to be the pawn of the disposition effect. We also explore the situations faced by investors and find that investors in the high-absolute-return quartiles are not disposed. JEL classification: D14; D31

Using a novel, and detailed custody trades dataset, this paper analyzes the trading behavior of institutions. Extant studies have examined the effects of past performance on trading by retail investors, day traders, and futures floor traders. Yet very little work has been done on institutions. We find that unlike other investors, institutions take on more risk following an increase in net profit and loss. However, the responses to a gain and loss are highly asymmetric. Institutions aggressively reduce risk in the wake of losses, but only mildly increase risk in the wake of gains. This asymmetry is more pronounced for experienced and older funds. Further, the performance dependence varies over the calendar year, and manifests itself at the security but not at the portfolio level. We relate these findings to the behavioral theories of narrow framing, dynamic loss aversion, and overconfidence.

Patterns of behavior of professionally managed and independent investors

European Finance Association, DePaul/the Federal Reserve Bank of Chicago, the University of