Retail Investors’ Disposition Effect and Order Choices

Abstract

Retail investors are prone to the disposition effect and submit many more limit orders than market orders. Mechanical effects stemming from the price-contingency conditions for order executions can lead these limit orders to inflate an investor's measured disposition effect (Linnainmaa 2010). Our paper is the first to demonstrate that the relationship between the disposition effect and order choices is bi-directional. Using trading data of thousands of investors, we show that investors who are prone to the disposition effect differ from others in their use of limit orders and in their choice of limit prices.

Keywords: retail investors, behavioral finance, disposition effect, order choices

JEL Classification: G11, G40