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Cited by 790Financial Markets and Investment StrategiesDecision-Making and Behavioral EconomicsFinancial Literacy, Pension, Retirement Analysis

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

Feng, Lei, Seasholes, Mark S.·2005·Review of Finance
DOI 10.1007/s10679-005-2262-0
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Abstract

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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Crossref · 10.1007/s10679-005-2262-0

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3 of 3 references verified0 citation errors · 0 not checkable

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  • Financially sophisticated investors tend to commit less investment mistakes.

    “A related strand of literature analyzes the association between financial literacy and trading behavior (e.g., Feng and Seasholes 2005;Bilias et al. 2010;Hoffmann et al. 2013;Bucher-Koenen and Ziegelmeyer 2014;Guiso and Viviano 2015) and the corresponding studies generally document a positive impact of financial literacy as financially sophisticated investors tend to commit less investment mist”

    From Financial literacy, financial advice, and financial behavior (2017) · cites this paper as Feng and Seasholes 2005

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Authors
Feng, L., & Seasholes, M. S.
Affiliations
  • Bear Stearns and Co
  • University of California, Berkeley (US)
ORCID
Feng, Lei
Venue
Review of Finance
Publisher
Oxford University Press (OUP)
Published
2005-01-01
Volume
9
Issue
3
Pages
305-351
ISSN
  • 1382-6662 (ISSN-L)
  • 1573-692X
  • 1572-3097
DOI
10.1007/s10679-005-2262-0
OpenAlex
W3125696892
Cited by
790
References
3
Citations by year
2026: 21 · 2025: 39 · 2024: 65 · 2023: 40 · 2022: 40 · 2021: 53 · 2020: 50 · 2019: 57 · 2018: 51 · 2017: 53 · 2016: 41 · 2015: 34 · 2014: 48 · 2013: 26 · 2012: 44
FWCI
25.64
Type
journal article
Language
en
Open access
closed
Locations
  • European Finance Review (publishedVersion)
  • Rare & Special e-Zone (The Hong Kong University of Science and Technology) (submittedVersion)
  • RePEc: Research Papers in Economics (submittedVersion)
Topics
  • Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
  • Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
  • Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
Keywords
disposition effect, investor sophistication, trading experience, behavioral biases, loss realization, investor heterogeneity, behavioral finance

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