Does the Consciousness of the Disposition Effect Increase the Equity Premium?

The disposition effect is a well-established phenomenon in the empirical and experimental financial literature. It leads to sell winners too early and to hold losers too long. In this paper, we show that the consciousness of the disposition effect by investors lead them to require a greater risk premium to invest in stocks (when compared to rational investors). We also analyze the role of the evaluation period for disposition investors. We show that the risk premium they require is a decreasing function of the delay between two evaluations of their portfolio. The influence of the evaluation period on the equity premium looks like the one induced by myopic loss aversion (Benartzi-Thaler [1995]), but the origin is different. Valuing more often a portfolio gives more occasions to sell winning stocks and then decreases the expected return. This point is analyzed by assuming that returns are driven by a Brownian motion and that investors evaluate their portfolio at regularly spaced dates