Are Investors Ever Rational?

Behavioral biases like disposition effect and over-confidence have received much attention as a potential driver of numerous anomalies observed in the markets. Also, it has been argued that information uncertainty tends to exacerbate these biases and induce stronger irrational behavior among investors. Using a unique investor-level database, this paper examines whether and how pertinent information impacts behavioral biases. We document that disposition effect in stocks is lower following high-degree of private information based trading during days preceding quarterly earnings announcements. Also, consistent with theoretical predictions, we find price discovery to be faster in stocks with lower disposition effect. Finally, we find that higher pre-announcement information asymmetry and disclosure noise increases disposition effect in the post-announcement period