Wide Framing Disposition Effect : An Empirical Study

We estimate the disposition effect for active traders in a large discount brokerage dataset containing US households’ trading records between 1991 and 1996. We apply a wide framing perspective, focusing on portfolios rather than individual stocks. We find that the disposition effect varies inversely with the proportion of stocks trading at a gain in the portfolio, nearly vanishing when this proportion reaches 50%. This is driven by how the realisation of gains and losses depends on the percentage of gains in the account. The probability to realise a loss increases with the percentage of gains in the account. The relation between the probability of realising a gain and the percentage of gains in the bank account follows a U-shape. We also estimate the change in the disposition effect when an investor realises more than one stock on a trading day. We find when investors sell a stock, they are much more likely to also realise another stock on the same day. In particular, selling a loss increases an investor’s propensity to sell a gain and vice versa. This key finding provides an explanation for the observed dependency of the disposition effect on the portfolio composition. We also propose several psychological explanations for our findings