Evidence from an Investment Experiment on the Disposition Effect : Does experience always work to your advantage?

Abstract Background: ​The disposition effect is a well-documented effect in behavioral finance, first brought to light in 1985 by Shefrin and Statman. The effect is caused by investors valuating unrealized gains and losses differently which can be connected to concepts like the prospect theory, Tverksy and Kahneman (1979), and loss aversion Kahneman et al. (1991). To examine the existence of the disposition effect in Sweden, the authors of this thesis performed a study where the participants played a stock simulation game. Purpose: ​The purpose of this study is to examine whether the investor experience plays a crucial part in the mitigation of the disposition effect. Method: ​The study of this thesis is conducted by collecting primary data using a quantitative research strategy by utilizing a virtual trading game and a post-experiment survey. Following this, the data derived from this experiment is used to calculate the disposition effect by calculating the Proportion of Gains Realized and Proportion of Losses Realized of the participants. To fulfill the purpose, t-tests in the form of one-sample t-tests and independent samples t-test were used to determine if the results of our study were statistically significant. Furthermore, Spearman correlations were also implemented to test for correlations between subgroups and the disposition effect. Conclusion: ​Statistically significant results confirm that there was a disposition effect among the subject group at a 1% confidence level. While there was a difference in disposition effect between the experienced and inexperienced groups, the difference was not statistically significant which could be explained by a small sample size and a subjective measure of experience