Market Expectations and Investment Behavior: The Case of the Disposition Effect

Authors: Steffen Andersen (Copenhagen Business School and CEPR), Tobin Hanspal (Goethe University and SAFE), Jimmy Martínez-Correa (Copenhagen Business School), and Kasper Meisner Nielsen (Hong Kong University of Science and Technology)

Title: Market Expectations and Investment Behavior: The Case of the Disposition Effect

Abstract: In this paper we study the link between subjective beliefs, portfolio choice, and investment biases. We use a novel research design which combines administrative data on actual portfolio allocations and transactions with experimentally elicited measures of subjective beliefs and risk taking. Our results correspond to our theoretical model characterizing the incidence and propensity to exhibit disposition effect behavior when subjective beliefs are high. We find that our elicited beliefs predict future investment behavior, including the incidence of the disposition effect. Our results suggest that optimism or differences in expectations may be important aspects of the disposition effect – and thus potentially for other documented behavioral investment biases.