New Evidences on the Disposition Effect of Individual Investors

Financial theory has identified the tendency of investors to hold loosing investments too long and sell winning ones too soon. This tendency was denominated the disposition effect by Shefrin and Statman (1985). This research provides evidence of the disposition effect on the Portuguese stock market, by studying a unique database that consists on trading records of 1496 individual investors. The preference for realising gains to losses was observed every month of the year and for all individual investors. Even at the end of the fiscal year, the disposition effect still holds (in spite of the existence of fiscal incentives for the so-called fiscal effect), as opposed to the evidence found in other markets. We also found that more sophisticated investors (classified on the basis of frequency of transaction, volume and portfolio value), are less prone to the disposition effect than less sophisticated ones. We also identified differences as to the disposition effect in terms of its intensity, when considering different market trends. In bull market periods, the disposition effect is even more evident than in bear markets and significant in both markets