Skip to main content
SpringerLink
Log in

The disposition effect: a survey

  • State-of-the-Art
  • Published:
Management Review Quarterly Aims and scope Submit manuscript

Abstract

The disposition effect is a well-recognized behavioral economic phenomenon which has been studied in numerous papers during the last three decades. Besides a literature review of the major theoretical, empirical, and experimental papers, the body of academic literature is subjected to a bibliometric analysis where all papers are taken into account which can be found via the search engine “EBSCOhost” (589 hits). This paper not only extensively describes the state of the art of research on the topic of the disposition effect. The combination of insights from a content analysis as well as a bibliometric analysis serves as a case study on the pattern of diffusion of research hypotheses and research methods. For example, it can be shown that the number of publications per year on the disposition effect remained relatively low subsequent to its discovery and only later started to substantially grow over time. On the other hand, the quality of papers, as approximated by the share of “A” journal articles per year, decreased over time.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5

Similar content being viewed by others

Notes

  1. Experiments are generally regarded as a method in empirical economics (see, e.g., Starmer 1999). Although experimental analyses generate empirical results, I discriminate experimental from empirical studies (see, e.g., Weber and Welfens 2006 who explicitly describe an empirical and an experimental study in the same paper). Throughout this paper, studies are described as “experimental” when the authors chose an experimental approach in which they explicitly test an experimental design in classroom or laboratory conditions. I refer to studies as “empirical” whenever field data or market data are analyzed.

  2. Ben-David and Hirshleifer (2012, p. 2491) even state that ”[p]erhaps the most prominent trading anomaly in financial economics is the disposition effect.“

  3. A broad variety of studies indicate a vast gap between selling prices (willingness to accept [WTA]) and buying prices (willingness to pay [WTP]) (see Kagel and Roth 1995) which is due to the fact that people prefer things they own (ceteris paribus). Norton et al. (2012) find that this pattern is enhanced when participants perform physical work on the valued object which they label the “IKEA effect”. Bühren and Pleßner (2014) found a phenomenon closely linked to these effects. Their “trophy effect” implies that the value people assign to certain objects substantially increases when they win the respective item in an effortful competition.

  4. In this context, Strahilevitz et al. (2011) show that investors in the sample of their empirical study are not willing to repurchase stocks which they had sold at a loss and stocks the price of which has risen directly after selling.

  5. Besides these prominent measures, other measures of the disposition effect exist. e.g., Goetzmann and Kumar (2008) use the so called adjusted disposition effect (ADE) measure. However, the PGR–PLR-methodology is more common and thus more suitable for the overview in Table 1.

  6. Ben-David and Hirshleifer (2012) offer an interesting finding in this context. They suggest that “at short holding periods, investors are more likely to sell big losers than small ones“ (Ben-David and Hirshleifer 2012, p. 2485).

  7. The measure of the cost basis Grinblatt and Han (2005) used concentrates on trading volume while Frazzini (2006) develops a measure which is based on portfolio holdings. He claims that “[t]he advantage of using holdings relies on the possibility of unambiguously identifying the fraction of shares purchased at a previous date that is still held by the original purchasers at the current date, thus taking into account shareholder heterogeneity in the anchor points“ (Frazzini 2006, p. 2023).

  8. Search “disposition effect“ in category “TX All Text” delivers the respective results.

  9. The authors analyze people’s behavior when waiting in line.

  10. I thank an anonymous referee for hinting me to that point.

  11. I thank an anonymous referee for hinting me to this point.

References

  • Akerlof GA (1970) The market for “lemons”: quality uncertainty and the market mechanism. Q J Econ 84(3):488–500

    Article  Google Scholar 

  • Amarnani N (2010) The disposition effect: a review of literature. Nirma Univ J Bus Manag Stud 4(3&4):19–35. SSRN: http://ssrn.com/abstract=1709225

  • Ammann M, Ising A, Kessler S (2012) Disposition effect and mutual fund performance. Appl Financ Econ 22(1):1–19

    Article  Google Scholar 

  • An L (2014) Asset pricing when traders sell extreme winners and losers. Working paper, Columbia University

  • Annaert J, Heyman D, Vanmaele M, Van Osselaer S (2008) Disposition bias and overconfidence in institutional trades. Working paper, Antwerp University

  • Bannert M, Iselin D, Schläpfer J, Sturm J-E (2011) Meisteruni Mannheim, Das Handelsblatt-Ranking 2011, Ökonomenstimme. http://www.oekonomenstimme.org/artikel/2011/09/meisteruni-mannheim/

  • Barber BM, Lee Y-T, Liu Y-J, Odean T (2007) Is the aggregate investor reluctant to realise losses? Evidence from Taiwan. Eur Financ Manag 13(3):423–447

    Article  Google Scholar 

  • Barberis N, Xiong W (2009) What drives the disposition effect? An analysis of a longstanding preference-based explanation. J Finance 64:751–784

    Article  Google Scholar 

  • Barberis N, Xiong W (2012) Realization utility. J Financ Econ 104:251–271

    Article  Google Scholar 

  • Ben-David, Hirshleifer (2012) Are investors really reluctant to realize their losses? Trading responses to past returns and the disposition Effect. Rev Financ Stud 25(8):2485–2532

  • Birru J (2015) Confusion of confusions: a test of the disposition effect and momentum. Rev Financ Stud 28:1849–1873

    Article  Google Scholar 

  • Boebel RB, Taylor L (2000) The disposition effect: do New Zealand investors keep their mistakes? Department of finance and quantitative analysis. University of Otago, Otago

    Google Scholar 

  • Boolell-Gunesh S, Broihanne MH, Merli M (2009) Disposition effect, investor sophistication and taxes: some French specificities. Finance 30(1):51–78

    Google Scholar 

  • Borghesi R (2014) The impact of the disposition effect on asset prices: insights from the NBA. J Econ Finance 38:698–711

    Article  Google Scholar 

  • Brown P, Chappel N, Da Silva Rosa R, Walter T (2006) The reach of the disposition effect: large sample evidence across investor classes. Int Rev Finance 6:43–78

    Article  Google Scholar 

  • Brown AL, Kagel JH (2009) Behavior in a simplified stock market: the status quo bias, the disposition effect and the ostrich effect. Ann Finance 5(1):1–14

    Article  Google Scholar 

  • Bühren C, Pleßner M (2014) The trophy effect. J Behav Decis Mak 27(4):363–377

    Google Scholar 

  • Case K, Shiller R (1988) The behavior of home buyers in boomand post-boom markets. N Engl Econ Rev 11:29–46

  • Cesarini D, Johannesson M, Magnusson PKE, Wallace B (2012) The behavioral genetics of behavioral anomalies. Manag Sci 58:21–34

    Article  Google Scholar 

  • Chen G, Kim KA, Nofsinger JR, Rui OM (2007) Trading performance disposition effect, overconfidence, representativeness bias, and experience of emerging market investors. J Behav Decis Mak 20:425–451

    Article  Google Scholar 

  • Chen MK, Lakshminarayanan V, Santos LR (2006) How basic are behavioral biases? Evidence from Capuchin monkey trading behavior. J Polit Econ 114:517–537

    Article  Google Scholar 

  • Cheng TY, Lee CI, Lin CH (2013) An examination of the relationship between the disposition effect and gender age, the traded security, and bull-bear market conditions. J Empir Finance 21:195–213

    Article  Google Scholar 

  • Choe H, Eom Y (2009) The disposition effect and investment performance in the futures market. J Futures Mark 29(6):496–522

    Article  Google Scholar 

  • Choi D (2014) When uninformed trades are asymmetric: the impact of the disposition effect on stock prices. Working paper, Hong Kong University of Science and Technology

  • Cici G (2012) The prevalence of the disposition effect in mutual funds’ trades. J Financ Quant Anal 47(4):795–820

    Article  Google Scholar 

  • Combes P-P, Linnemer L (2010) Inferring missing citations: a quantitative multi-criteria ranking of all journals in economics. Working papers halshs-00520325, HAL

  • Constantinides GM (1983) Capital market equilibrium with personal tax. Econometrica 51:611–636

    Article  Google Scholar 

  • Coricelli G, Critchley HD, Joffily M, O’Doherty JD, Sirigu A, Dolan RJ (2005) Regret and its avoidance: a neuroimaging study of choice behavior. Nat Neurosci 8:1255–1262

    Article  Google Scholar 

  • Corso T, Prat M, Vaquero E (2014) Behavioral finance in Joseph de la Vega’s confusion de confusiones. J Behav Finance 15(4):341–350

    Article  Google Scholar 

  • Coursey DL, Hovis JL, Schulze WD (1987) The disparity between willingness to accept and willingness to pay measures of value. Q J Econ 2:679–690

    Article  Google Scholar 

  • Cronqvist H, Siegel S (2014) The genetics of investment biases. J Financ Econ 113:215–234

    Article  Google Scholar 

  • Da Costa N Jr, Mineto C, Da Silva S (2008) Disposition effect and gender. Appl Econ Lett 15(6):411–416

    Article  Google Scholar 

  • Da Costa N Jr, Goulart M, Cupertino C, Macedo J Jr, Da Silva S (2013) The disposition effect and investor experience. J Bank Finance 37(5):1669–1675

    Article  Google Scholar 

  • Dhar R, Zhu N (2006) Up close and personal: investor sophistication and the disposition effect. Manag Sci 52(5):726–740

    Article  Google Scholar 

  • Dorn D, Strobl G (2011) Rational disposition effects: theoryand evidence. Working paper, Drexel University

  • Einiö M, Kaustia M, Puttonen V (2008) Price setting and the reluctance to realize losses in apartment markets. J Econ Psychol 29(1):19–34

    Article  Google Scholar 

  • Feng L, Seasholes M (2005) Do investor sophistication andtrading experience eliminate behavioral biases in finance markets? Rev Finance 9:305–351

    Article  Google Scholar 

  • Ferris SP, Haugen RA, Makhija AK (1988) Predicting contemporary volume with historic volume at differential price levels: evidence supporting the disposition effect. J Finance 43(3):677–697

    Article  Google Scholar 

  • Fischbacher U, Hoffmann G, Schudy S (2014) The causal effect of stop-loss and take-gain orders on the disposition effect. Res Pap Ser/Thurgauer Wirtschaftsinstitut, 89

  • Frazzini A (2006) The disposition effect and underreaction to news. J Finance 61(4):2017–2046

    Article  Google Scholar 

  • Frydman C, Rangel A (2014) Debiasing the disposition effect by reducing the saliency of information about a stock’s purchase price. J Econ Behav Organ 107:541–552

    Article  Google Scholar 

  • Frydman C, Barberis N, Camerer C, Bossaerts P, Rangel A (2014) Using neural data to test a theory of investor behavior: an application to realization utility. J Finance 69:907–946

    Article  Google Scholar 

  • Fu H-P, Chen S-H (2012) Seasonal disposition and reverse disposition effects: evidence from Taiwanese stock market. Working paper, Providence University, Taichung, Taiwan

  • Galai D, Sade O (2006) The ‘ostrich effect’ and the relationship between the liquidity and the yields of financial assets. J Bus 79(5):2741–2759

    Article  Google Scholar 

  • Gans JS, Shepherd GB (1994) How are the mighty fallen: rejected classic articles by leading economists. J Econ Perspect 8(1):165–179

    Article  Google Scholar 

  • Genesove D, Mayer C (2001) Loss aversion and seller behavior: evidence from the housing market. Quart J Econ 116(4):1233–1260

    Article  Google Scholar 

  • Gerke W, Bienert H (1993) Überprüfung des Dispositionseffektes und seiner Auswirkungen in computerisierten Börsenexperimenten. Zeitschrift für betriebswirtschaftliche Forschung, Sonderheft 31:169–194

    Google Scholar 

  • Gerke W, Bienert H (1994) Computerisierte Börsenexperimente. Ein Beitrag zu einer Experimentellen Kapitalmarktforschung (With English summary.), Z Wirtsch Sozialwiss 114(4):573–596

    Google Scholar 

  • Goetzmann WN, Kumar A (2008) Equity portfolio diversification. Rev Finance 12:433–463

    Article  Google Scholar 

  • Gong G, Wright D (2013) Investor characteristics and the disposition effect. Working paper, University of Sydney

  • Goo Y-J, Chen D-H, Sylcien Chang S-H, Yeh C-F (2010) A study of the disposition effect for individual investors in the Taiwan stock market. Emerg Mark Finance Trade 46(1):108–119

    Article  Google Scholar 

  • Goulart M, Da Costa N Jr, Santos A, Takase E, Da Silva S (2013) Psychophysiological correlates of the disposition effect. PLOS ONE 8:1

    Google Scholar 

  • Grinblatt M, Keloharju M (2001) What makes investors trade? J Finance 56(2):589–616

    Article  Google Scholar 

  • Grinblatt M, Han B (2005) Prospect theory, mental accounting, and momentum. J Financ Econ 78:311–333

    Article  Google Scholar 

  • Harris L (1988) Discussion. J Finance 43(3):698–699

    Google Scholar 

  • Hartzmark SM, Solomon DH (2012) Efficiency and the disposition effect in NFL prediction markets. Q J Finance 2(3):1–42

    Article  Google Scholar 

  • Heisler J (1994) Loss aversion in a futures market: an empirical test. Rev Futures Mark 13:793–822

    Google Scholar 

  • Hens T, Vlcek M (2011) Does prospect theory explain the disposition effect? J Behav Finance 12(3):141–157

    Article  Google Scholar 

  • Hung M-W, Yu H-Y (2006) A heterogeneous model of disposition effect. Appl Econ 38(18):2147–2157

    Article  Google Scholar 

  • Jegadeesh N, Titman S (1993) Returns to buying winners and selling losers: implications for stock market efficiency. J Finance 48(1):65–91

    Article  Google Scholar 

  • Jin L, Scherbina A (2011) Inheriting losers. Rev Financ Stud 24(3):786–820

    Article  Google Scholar 

  • Kagel JH, Roth AE (1995) The handbook of experimental economics. Princeton University Press, Princeton

    Google Scholar 

  • Kahneman D, Knetsch JL, Thaler RH (1990) Experimental tests of the endowment effect and the coase theorem. J Polit Econ 98:1325–1348

    Article  Google Scholar 

  • Kahneman D, Tversky A (1979) Prospect theory: an analysis of decision under risk. Econometrica 47(2):263–291

    Article  Google Scholar 

  • Kaustia M (2010a) Disposition effect. In: Kent Baker H, Nofsinger JR (eds) Behavioral finance: investors, corporations, and markets. Wiley, New York, pp 171–190

    Google Scholar 

  • Kaustia M (2010b) Prospect theory and the disposition effect. J Financ Quant Anal 45(3):791–812

    Article  Google Scholar 

  • Kirchler E, Maciejovsky B, Weber M (2005) Framing effects, selective information, and market behavior: an experimental analysis. J Behav Finance 6(2):90–100

    Article  Google Scholar 

  • Krause A, Wei KCJ, Yang Z (2009) Determinants of disposition and reverse disposition effects. Working paper, University of Bath

  • Kuo M-H (2011) How to lessen the disposition effect? On the investment study hypothesis. In: Proceedings for the northeast region decision sciences institute (NEDSI), pp 122–134

  • Lai H-W, Chen C-W, Huang C-S (2010) Technical Analysis, investment psychology, and liquidity provision: evidence from the taiwan stock market. Emerg Mark Finance Trade 46(5):18–38

    Article  Google Scholar 

  • Lakonishok J, Smidt S (1986) Volume for winners and losers: taxation and other motives for stock trading. J Finance 41(4):951–974

    Article  Google Scholar 

  • Lakshminaryanan V, Chen MK, Santos LR (2008) Endowment effect in capuchin monkeys. Philos Trans R Soc 363:3837–3844

    Article  Google Scholar 

  • Lakshminarayanan V, Chen MK, Santos LR (2011) Theevolution of decision-making under risk: framing effects in monkeyrisk preferences. J Exp Soc Psychol 47:689–693

    Article  Google Scholar 

  • List JA (2003) Does market experience eliminate market anomalies? Quart J Econ 118(1):41–72

    Article  Google Scholar 

  • Locke PR, Mann SC (2000) Do professional traders exhibit loss realization aversion? Working paper George Washington University

  • Locke PR, Mann SC (2005) Professional trader discipline and trade disposition. J Financ Econ 76(2):401–444

    Article  Google Scholar 

  • Marquis M, Filiatrault P (2003) Public self-consciousness disposition effect on reactions to waiting in line. J Consum Behav 2(3):212

    Article  Google Scholar 

  • Meng J (2010) The disposition effect and expectations as reference point. Working paper, Guanghua School of Management, Peking University

  • Norton MI, Mochon D, Ariely D (2012) The IKEA effect: when labor leads to love. J Consum Psychol 22(3):453–460

    Article  Google Scholar 

  • Nöth M (2005) Reduktion des Dispositionseffekts privater Anleger durch Einsatz technischer Handelsregeln. Z Betriebswirt 75(5):455–475

    Google Scholar 

  • Odean T (1998) Are investors reluctant to realize their losses? J Finance 53(5):1775–1798

    Article  Google Scholar 

  • Oehler A, Heilmann K, Läger V, Oberländer M (2003) Coexistence of disposition investors and momentum traders in stock markets: experimental evidence. J Int Financ Mark Inst Money 13(5):503–524

    Article  Google Scholar 

  • Ormos M, Joó I (2014) Are Hungarian investors reluctant to realize their losses? Econ Model 40:52–58

    Article  Google Scholar 

  • Ploner M (2014) Hold on to it? An experimental analysis of the disposition effect. CEEL working paper, pp 5–14

  • Rau HA (2014) The disposition effect and loss aversion: do gender differences matter? Econ Lett 123(1):33–36

    Article  Google Scholar 

  • Read D, Loewenstein G, Rabin M (1999) Choice bracketing. J Risk Uncertain 19(1–3):171–197

    Article  Google Scholar 

  • Rubaltelli E, Rubichi S, Savadori L, Tedeschi M, Ferretti R (2005) Numerical information format and investment decisions: implications for the disposition effect and the status quo bias. J Behav Finance 6(1):19–26

    Article  Google Scholar 

  • Samuelson W, Zeckhauser R (1988) Status quo bias in decision making. J Risk Uncertain 1:7–59

    Article  Google Scholar 

  • Schlarbaum GG, Lewellen WG, Lease RC (1978) Realized returns on common stock investments: the experience of individual investors. J Bus 51(2):299–325

    Article  Google Scholar 

  • Shapira Z, Venezia I (2001) Patterns of behavior of professionally managed and independent investors. J Bank Finance 25(8):1573–1587

    Article  Google Scholar 

  • Shefrin H, Statman M (1985) The disposition to sell winners too early and ride losers too long: theory and evidence. J Finance 40(3):777–790

    Article  Google Scholar 

  • Shu P-G, Yeh Y-H, Chiu S-B, Chen H-C (2005) Are Taiwanese individual investors reluctant to realize their losses? Pac Basin Finance J 13(2):201–223

    Article  Google Scholar 

  • Shumway T (1997) Explaining returns with loss aversion. Working paper, University of Michigan

  • Shumway T, Wu G (2006) Does disposition drive momentum? Working paper, University of Michigan

  • Starmer C (1999) Experiments in economics: should we trust the dismal scientists in white coats? J Econ Methodol 6(1):1–30

    Article  Google Scholar 

  • Stracca L (2004) Behavioral finance and asset prices: where do we stand? J Econ Psychol 25:373–405

    Article  Google Scholar 

  • Strahilevitz MA, Odean T, Barber BM (2011) Once burned, twice shy: how Naïve learning, counterfactuals, and regret affect the repurchase of stocks previously sold. J Mark Res 48:102–120

    Article  Google Scholar 

  • Talpsepp T (2010) Does gender and age affect investor performance and the disposition effect? Res Econ Bus Cent Eastern Europe 2(1):76–93

    Google Scholar 

  • Talpsepp T (2011) Reverse disposition effect of foreign investors. J Behav Finance 12(4):183–200

    Article  Google Scholar 

  • Thaler RH (1980) Toward a positive theory of consumer choice. J Econ Behav Organ 1:39–60

    Article  Google Scholar 

  • Thaler RH (1984) Using mental accounting in a theory of consumer behavior. Working paper, Cornell University

  • Thaler RH (1999) Mental accounting matters. J Behav Decis Mak 12:183–206

    Article  Google Scholar 

  • Thaler RH, Shefrin H (1981) An economic theory of self-control. J Polit Econ 89:392–410

    Article  Google Scholar 

  • Thaler RH, Johnson EJ (1990) Gambling with the house money and trying to break even: the effects of prior outcomes on risky choice. Manag Sci 36(6):643–660

    Article  Google Scholar 

  • Tversky A, Kahneman D (1992) Advances in prospect theory: cumulative representation of uncertainty. J Risk Uncertain 5(4):297–323

    Article  Google Scholar 

  • van der Sar NL (2004) Behavioral finance: how matters stand. J Econ Psychol 25:425–444

    Article  Google Scholar 

  • van Raan AFJ (2001) Bibliometrics and internet: some observations and expectations. Scientometrics 50:59–63

    Article  Google Scholar 

  • Visaltanachoti N, Luo H, Lu L (2007) Holding periods, illiquidity and disposition effect in the Chinese stock markets. Appl Financ Econ 17(15):1265–1274

    Article  Google Scholar 

  • Weber M, Camerer C (1998) The disposition effect in securities trading: an experimental analysis. J Econ Behav Organ 33:167–184

    Article  Google Scholar 

  • Weber M, Welfens F (2006) An individual level analysis of the disposition effect: empirical and experimental evidence. Working paper, University of Mannheim

  • Wohlrabe K (2011) Das Handelsblatt- und das RePEc-Ranking im Vergleich, ifo Schnelldienst 17/2011 – 64. Jahrgang, 66–71

  • Yates JF, Lee J, Bush JG (1997) General knowledge overconfidence: cross-national variations, response style, and “reality”. Organ Behav Hum Decis Process 70(2):87–94

  • Zhong S, Israel S, Xue H, Sham P, Ebstein R, Chew S (2009) A neurochemical approach to valuation sensitivity over gains and losses. Proc R Soc B Biol Sci 276:4181–4188

    Article  Google Scholar 

  • Zweig J (2008) Should you fear the Ostrich effect? Wall Street Journal Eastern Edition, 252. http://www.wsj.com/articles/SB122125886256030143

Download references

Acknowledgements

I thank Christoph Bühren, Björn Frank, Christian Klein and two anonymous referees for their helpful comments.

Author information

Authors and Affiliations

  1. University of Kassel, Kassel, Germany

    Marco Pleßner

  2. IVWL, Nora-Platiel-Straße 4, 34127, Kassel, Germany

    Marco Pleßner

Authors
  1. Marco Pleßner
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Marco Pleßner.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Pleßner, M. The disposition effect: a survey. Manag Rev Q 67, 1–30 (2017). https://doi.org/10.1007/s11301-017-0122-6

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11301-017-0122-6

Keywords

JEL Classsification

Search

Navigation