What Causes the Disposition Effect? Evidence from Corporate Insiders

Abstract

While most researchers agree on the existence of the disposition effect, questions remain regarding its cause. We investigate several potential theories by examining the trading decisions of corporate insiders. Although insiders exhibit the disposition effect, the odds of a corporate insider repurchasing a losing position are significantly higher than the odds of repurchasing a winning position. We conjecture that the preference of holding onto, and augmenting, losing positions is driven in part by the belief that ‘losers’ will soon revert. This contrarian tendency of insiders seems justified as loser repurchases outperform winner repurchases.