The disposition effect among mutual fund participants in Portugal

The disposition effect is the propensity of investors to sell assets on which they have experienced gains and to hold assets on which they have faced (unrealized) losses. This paper studies the disposition effect among mutual fund participants in Portugal.

Using a large sample of transaction-level records from a major bank for the period from 1998 to 2017, this paper finds evidence of a strong disposition effect among mutual fund investors in Portugal.

Literacy and trading experience weaken the disposition effect exhibited by mutual fund participants, but do not eliminate it. The disposition effect exists in both bull and bear markets, but it is more sizable during periods of positive sentiment. Evidence of the disposition effect persists after accounting for bad emotions, irrational beliefs, redemption fees, or the someone-to-blame hypothesis.

The findings in this paper challenge the conclusions of similar studies conducted for other countries. Existing studies using mutual funds–delegated management–challenge the evidence obtained for the stock market–direct ownership. For example, research as shown that investors avoid realizing losses because they dislike admitting that past purchases were mistakes, but delegation reverses this effect by allowing the investor to blame the manager instead. According to this evidence, the propensity to realize past gains more than past losses applies only to non-delegated assets like individual stocks.

The findings in this paper have potentially relevant normative implications given that the existence of the disposition effect imposes substantial costs on investors: there are benefits for investors (and the society) from the acquisition of higher levels of literacy.

Click here to go to the paper by Paulo Silva, Victor Mendes, and Margarida Abreu.