Reference Price Formation for Packaged Transactions

This paper provides an in depth analysis of the reference price investors apply when they decide if a security is to be kept or sold. We propose that the observed reluctance to crystallize losses and propensity to realize gains, a behavioral bias dubbed the disposition effect, may be a result of the reference investors apply to determine if an investments is in profit or at loss. We examine a comprehensive data set comprised of all trading records for investors within the Nasdaq OMX Helsinki market over a recent seven year period. We find that the disposition effect is statistically and economically significant in the short run for a sample of active individual investors that purchase shares at one price in one package. It appears that there can be significant reduction in the extent of the disposition effect by simply reducing the significance of the purchase price by packaging buy transactions