Speculating in Gains, Waiting in Losses : A Closer Look at the Disposition Effect

Investors tend to hold losing stocks too long and sell winning stocks too soon, which is referred to as the disposition effect. Using the trading data from Estonian stock market as well as the laboratory experiments, we find that investment decisions depend on the current performance and the past price movement. In the experiment, the participants appear to stay with their last period allocations if they had losses on investments, whereas they follow more active contrar- ian strategies if they had made positive profits. The trading behavior of investors in Estonian stock market are mostly consistent with our experimental results, i.e., contrarian strategies in gains and holding stocks in losses. Our experiment suggests that the risk attitude in losses, together with wishful thinking and misperception of the price process, such as gambler's fallacy, may attribute to the observed disposition effect