Investor Sophistication, Learning and the Disposition Effect
28 Pages Posted: 16 May 2011
Date Written: February 2011
This paper analyses the disposition effect at an individual level by studying the trading records of 20 379 investors over 1999-2006. As in previous studies, we confirm a huge heterogeneity among investors and we propose to explain these differences on the basis of financial sophistication and trading behavior proxies. Originally, we use direct sophistication variables: trading of foreign assets, derivative assets and bonds, and trading on both tax-free and traditional accounts. We show that these variables significantly reduce the level of the disposition effect. Furthermore, based on a dynamic panel data analysis, we question the ability of investors to correct their bias over time. Results show that the individual investor’s disposition effect decreases over time and that our sophistication variables play a role in the decrease.
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