The Reverse-Disposition Effect: Theory and Evidence

The disposition effect has been confirmed by a large number of empirical investigations, it is a widely accepted empirical fact in behavioral finance. But few studies has paid attention on the actions and strategies of its counterparties - reverse disposition effect, which means investors tend to buy stocks that has risen in value while sell stocks that has decreased in value. We perform an experiment to test both the disposition and reverse disposition effects. Our results reveal that investors show different actions depending on the trends of the market. We find a surprising phenomenon that there is a reverse disposition effect in downward market, investors tend to buy stocks whose price has dropped. We also find that the disposition effect depends strongly on the reverse disposition effect.