Together with my co-authors Rudy De Winne and Nhung Luong (both UCLouvain), we examined how retail investors’ disposition effect — the well-documented tendency to sell winning investments too readily and hold on to losing ones too long — shows up not just in whether investors sell, but in how they place their sell orders. We first ran a controlled lab experiment to obtain a clean, mechanically unbiased measure of each participant’s disposition effect, then combined this with a large dataset of real trading records from a Belgian online broker spanning 2003–2021. We find that investors with a strong disposition effect submit relatively more sell orders when positions are at a gain, and that in the loss domain they set limit prices closer to (or above) their purchase price, place these limits farther above the prevailing market price, and rely more on good-till-canceled instructions — all consistent with a reluctance to lock in losses. Our results suggest that the disposition effect is reflected not only in transaction data but also in the way investors structure the orders that lead to those transactions.
I’m particularly proud of this one for how it ties together the experimental and empirical parts: the lab study gives us a causally clean benchmark for who is prone to the disposition effect, and the brokerage data lets us show the same pattern holds up at scale, in real markets.
One more thing makes this publication special to me: it’s the first paper I’ve had published in the Journal of Behavioral and Experimental Finance in the nearly nine years I’ve served as its Co-Editor-in-Chief. Needless to say, the entire review process was handled independently by my co-editor — as an author with a conflict of interest, I was blocked from accessing the manuscript in the editorial system throughout.
