Do investor sophistication and trading experience eliminate behavioral biases in financial markets?

Lei Feng, Mark Seasholes

Research output: Contribution to journalReview article

227 Citations (Scopus)

Abstract

This paper provides an in depth analysis of an investor's reluctance to realize losses and his propensity to realize gains - a behavior known as the disposition effect. Together, sophistication (static differences across investors) and trading experience (evolving behavior of a single investor) eliminate the reluctance to realize losses. However, an asymmetry exists as sophistication and trading experience reduce the propensity to realize gains by 37% (but fail to eliminate this part of the behavior.) Our research design allows us to follow an individual's behavior from the start of his investing life/career. This ability makes it possible to track the evolution of the disposition effect as it is reduced and/or disappears. Our results are robust to alternative explanations including feedback trading, calendar effects, and frequency of observation.

Original languageEnglish (US)
Pages (from-to)305-351
Number of pages47
JournalReview of Finance
Volume9
Issue number3
DOIs
StatePublished - Sep 2005
Externally publishedYes

Fingerprint

Investors
Behavioral biases
Investor sophistication
Financial markets
Sophistication
Disposition effect
Propensity
Individual behaviour
Research design
Calendar effects
Investing
Feedback trading
Asymmetry

ASJC Scopus subject areas

  • Finance

Cite this

Do investor sophistication and trading experience eliminate behavioral biases in financial markets? / Feng, Lei; Seasholes, Mark.

In: Review of Finance, Vol. 9, No. 3, 09.2005, p. 305-351.

Research output: Contribution to journalReview article

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