A detailed investigation of the disposition effect and individual trading behavior: a panel survival approach

Abstract

This article uses a panel survival approach to analyze the trading behavior of foreign exchange traders. We concentrate on a detailed characterization of the shape of the disposition effect over the entire profit and loss regions. In doing so, we investigate the influence of a number of trading characteristics on the impact of the disposition effect. These trading characteristics include: special limit order strategies, trading success, size and the experience of our investors. Our main findings are that (i) the disposition effect has a nonlinear shape. For small profits and losses we find an inverted disposition effect, while for larger ones, the usual positive disposition effect emerges. (ii) The inverted disposition effect is driven to a great extend by patient and cautious investors closing their positions with special limit orders (take-profit and stop-loss). The normal positive disposition effect is found to be intensified for impatient investors closing their positions actively with market orders. (iii) We show that unsuccessful investors reveal a stronger inverse disposition effect. (iv) Evidence that bigger investors are less prone to the disposition effect than smaller investors is also found.