The Portfolio-Driven Disposition Effect

Posted: 6 Mar 2018 | Last revised: 29 Oct 2020

Li An
Tsinghua University – PBC School of Finance

Joseph Engelberg
University of California, San Diego (UCSD) – Rady School of Management

Matthew Henriksson
University of Mississippi – School of Business Administration

Baolian Wang
University of Florida – Department of Finance, Insurance and Real Estate

Jared Williams
University of South Florida

Abstract

In simple univariate tests, the disposition effect for a stock nearly disappears if the portfolio is at a gain. We find a large disposition effect when the portfolio is at a loss. The portfolio-driven disposition effect that we document is not explained by extreme returns, portfolio rebalancing, simultaneous transactions, or investor sophistication/skill. We consider hedonic mental accounting and preferences over both paper and realized gains/losses as potential explanations for our findings.

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