Applied Academic Research, December 2012

The Disposition Effect and Investment Strategy

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  • The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence – Seminal paper which identifies the term “disposition effect”
  • Are Investors Reluctant to Realize Their Losses? – A study using individual investors’ accounts and finds that the disposition effect holds when looking at actual trades of investors: investors sell their winners too early and hold onto their losers too long.
  • The Disposition Effect in Securities Trading: an Experimental Analysis – Experimental design which shows disposition effect occurs even when knowing the distribution of returns, and finds a way to minimize this effect.
  • The Disposition Effect and Underreaction to News —A way to make money off the disposition effect, the strategy generates over 200 basis points in alpha per month!

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