Hold on to it? An Experimental Analysis of the Disposition Effect

This paper experimentally investigates a well-known anomaly in portfolio management, i.e. the fact that paper losses are realized less than paper gains (disposition effect). The existence of the disposition effect is documented in a simple risk task which demonstrates that the anomaly is most likely due to a higher degree of risk aversion of those experiencing a loss in a prior investment relative to those experiencing a gain. However, when an “emotionally colder” choice protocol is adopted, a reverse dispo- sition effect is observed. The results of the study may help design trading rules to overcome the pitfalls of the disposition effect.