The disposition effect in securities trading: an experimental analysis

Abstract

The ‘disposition effect’ is the tendency to sell assets that have gained value (‘winners’) and keep assets that have lost value (‘losers’). Disposition effects can be explained by the two features of prospect theory: the idea that people value gains and losses relative to a reference point (the initial purchase price of shares), and the tendency to seek risk when faced with possible losses, and avoid risk when a certain gain is possible. Our experiments were designed to see if subjects would exhibit disposition effects. Subjects bought and sold shares in six risky assets. Asset prices fluctuated in each period. Contrary to Bayesian optimization, subjects did tend to sell winners and keep losers. When the shares were automatically sold after each period, the disposition effect was greatly reduced.