The disposition effect and investor experience

Abstract

We examine whether investing experience can dampen the disposition effect, that is, the fact that investors seem to hold on to their losing stocks to a greater extent than they hold on to their winning stocks. To do so, we devise a computer program that simulates the stock market. We use the program in an experiment with two groups of subjects, namely experienced investors and undergraduate students (the inexperienced investors). As a control procedure, we consider random trade decisions made by robot subjects. We find that though both human subjects show the disposition effect, the more experienced investors are less affected.

The disposition effect in team investment decisions: Experimental evidence

“…The emergence of disposition effects is empirically (e.g., Odean, 1998;Dhar and Zhu, 2006) and experimentally (e.g., Weber and Camerer, 1998;Da Costa Jr et al, 2013) well-confirmed for single investors. Hence, we expect that single investors in our experiment will exhibit disposition effects.…”

“…Da Costa Jr et al (2013) argue that experienced traders exhibit smaller disposition effects than students. Moreover, disposition effects become smaller when the purchase prices of stocks are prominently displayed (Frydman and Rangel, 2014) or when automatic-selling options are used (Fischbacher et al, 2014).…”

“…Odean (1998) and Da Costa Jr et al (2013) point out that the DE measure has the disadvantage that it is sensitive to portfolio size and trading frequency. 11 Therefore, we also 9 Figure 4 in the Appendix highlights that the three measures do not significantly differ.…”

“…10 We want to thank an anonymous referee for this comment. 11 Da Costa Jr et al (2013) report that the PGR and PLR are likely to be smaller for investors who hold larger portfolios and trade frequently.…”

Investment competence and advice seeking

“…Those researchers observe that investors who gain more investment experience through frequent trading are less vulnerable to the disposition effect. In comparing experienced investors and undergraduates students, Costa et al (2013) find that both groups are subject to the disposition effect but that the experienced investors are less so. The relevance of price movements is indirectly observed by Weber and Camerer (1998).…”