Are All Individual Investors Equally Prone to the Disposition Effect All the Time? New Evidences from a Small Market

Abstract

This paper investigates the disposition effect on the Portuguese stock market, on the basis of a unique database that consists of trading records of 1496 individual investors. We found strong evidence of the disposition effect, studied on the basis of trades, volume and value traded. This preference for realizing gains to losses was observed every month of the year and for all individual investors. Even in 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 studied the disposition effect related to market tendency. By partitioning the data period in a bull and a bear period, we found evidence of disposition effect for both periods, but with differences in terms of its intensity. In bull market periods, the disposition effect is even more evident than in bear markets. These results, we believe, can strongly be explained with behavioral reasons. We also investigated the disposition effect related to investors' sophistication. We partitioned investors, classifying sophisticated investors as the ones that trade more frequently, have a higher volume of transactions and a higher portfolio value and found evidence that more sophisticated investors are less prone to the disposition effect than less sophisticated ones, even though both groups exhibit evidence of this effect.