Portfolio Composition and Investors' Trading Patterns Toward 1/N

We explore how an understudied factor, portfolio composition, affects investors' trading preferences and whether it is associated with the Disposition Effect. Behavioral lab experiments reveal predictable trading patterns depending on salient holding amounts in the portfolio, and the latter's association with the amount subjects were asked to sell. E.g., when instructed to sell $600 subjects tend to make simple trades, like 2X$300, or 4X$150, particularly if portfolio composition highlighted such amounts. These biased trades are inconsistent with portfolio theory, bringing the portfolio toward 1/N. Portfolio managers should be aware of such trading patterns since they may be sub-optimal by modern portfolio theory