The Disposition Effect and the Ability of Investors to Learn

Abstract

This paper provides an in depth analysis of investors’ reluctance to crystallise losses and propensity to realise gains, a behavioural bias dubbed the disposition effect. We examine a comprehensive data set comprised of trading records for individual and institutional investors within the Finnish Stock Market over an extensive ten year period. Consistent with previous studies, we find that the disposition effect exists for not only individuals, but also for institutions. We conclude that despite significantly attenuating, ‘professionalism’ (i.e. investor sophistication) is unable to provide total immunity from the disposition bias. Moreover, this study confirms the existence of an apparent asymmetric relationship between trading experience and the disposition effect. Both individuals and institutions exhibit learning effects over time, with the accumulation of trading experience inversely related to the bias. However, while investors are capable of completely eliminating their tendency to ride losses, we found that no amount of trading experience is capable of eradicating an investor’s propensity to realise gains.