Splitting the Disposition Effect : Asymmetric Reactions Towards 'Selling Winners' and 'Holding Losers'

The disposition effect describes investors' common tendency of quitting a winning investment too soon and holding on to losing investments too long. Since Shefrin and Statman (1985), the two sides of the disposition effect, i.e. quot;selling winnersquot; and quot;holding losersquot;, have been assessed as one coherent bias. High-disposition investors are usually modeled to sell their winners quickly while almost never selling losers, while low-disposition investors are assumed to behave in the opposite way. Investigating both account level field data as well as data from a controlled laboratory experiment, we however show that individual investors' reactions towards quot;selling winnersquot; and quot;holding losersquot; are completely independent, meaning that the disposition effect is better depicted as two separate biases, investors' quot;preference for cashing-in gainsquot; and their quot;loss realization aversionquot;. Furthermore, investors' individual preferences towards both sides are also stable over tasks and time so that both biases can be seen and modeled as individual per-sonality traits