The disposition effect: who and when?

The disposition effect (DE) is a common investment bias consisting of the tendency to sell profitable assets and hold losing assets. We investigate individual determinants of the DE in a standard experimental environment as well as one with transaction costs and one with a competitive payment scheme. Overall DE is positive and significant in all trading environments. In line with previous results in the literature, we find that women are more reluctant to sell losing assets than men in the standard environment. However, this difference disappears in the presence of transaction costs. Contrary to earlier reports, we do not find a significant gender difference in the DE in any environment. Novelly, we find that the most significant psychological predictor of the reluctance to realize losses is the difficulty in recognizing one’s errors. This constitutes novel direct evidence that “investors are also reluctant to accept and realize losses because the very act of doing so proves that their first judgment was wrong” (Gross, 1982, p. 150).