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Review of Finance 2005 9(3):305-351; doi:10.1007/s10679-005-2262-0
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© Springer

Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?

Lei Feng and Mark S. Seasholes

Bear Stearns and Co
U.C. Berkeley

This paper provides an in depth analysis of an investor's reluctance to realize losses and his propensity to realize gains – a behavior known as the disposition effect. Together, sophistication (static differences across investors) and trading experience (evolving behavior of a single investor) eliminate the reluctance to realize losses. However, an asymmetry exists as sophistication and trading experience reduce the propensity to realize gains by 37% (but fail to eliminate this part of the behavior.) Our research design allows us to follow an individual's behavior from the start of his investing life/career. This ability makes it possible to track the evolution of the disposition effect as it is reduced and/or disappears.Our results are robust to alternative explanations including feedback trading, calendar effects, and frequency of observation.


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