The disposition effect: Do New Zealand investors keep their mistakes?

Abstract

This paper tests the disposition effect first tested by Odean (1998) the tendency of investors to show a preference towards realising winning investments over losing investments in New Zealand by analysing 125 trading accounts from a nationwide retail brokerage house between the 1st June, 1988, to the 30th April, 1999. The analysis is performed using two different reference points for measuring winning investments and losing investments. Firstly, the average purchase price of the security is used and secondly, a relative strength measure is employed to indicate the recent performance of the security. Overall, the investors tend not to exhibit characteristics of the disposition effect, when the average purchase price is used as a reference point from which to evaluate winners and losers. When the relative strength measure is used on the same data set, the investors tend to exhibit a slight disposition effect, which is driven by the more frequent traders in the data set. However, this disposition effect seems to disappear once the data set is expanded to include addition sales for which the purchase price is unknown.