Are Investors Really Reluctant to Realize their Losses? Trading Responses to Past Returns and the Disposition Effect

Itzhak Ben-David and David Hirshleifer

Review of Financial Studies, August 2012


We examine how investor preferences and beliefs affect trading in relation to past gains and losses. The probability of selling as a function of profit is V-shaped; for short prior holding periods, investors are much more likely to sell big losers than small ones. There is little evidence of an upward jump in selling probability at zero profits. These findings provide no clear indication that realization preference helps explain investor trading behavior. Furthermore, the disposition effect is not primarily driven by a direct preference for realizing winners rather than losers. Trading based on beliefs can potentially explain these findings.

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