Up Close and Personal: Investor Sophistication and the Disposition Effect

This paper analyzes the trading records of a major discount brokerage house to investigate the disposition effect, the tendency to sell stocks that have appreciated in price (winners) sooner than stocks that trade below the purchase price (losers). In contrast to previous research that has demonstrated the disposition effect by aggregating across investors, our main objective is to identify differences in the disposition bias across individuals and explain this in terms of underlying investor characteristics. Building on the findings in experimental economics and social psychology, we hypothesize that differences in investor literacy about financial markets and trading frequency are responsible in part for the…