Disposition Bias And Overconfidence In Institutional Trades
Source: Ghent University
Using a unique data set of mutual fund transactions, this paper examines two widely acknowledged behavioural biases: overconfidence in trading and disposition behaviour. The authors test for the first bias by comparing the ex post profitability of the purchased and sold securities by mutual funds. Their empirical results show that the returns on the purchased securities are not worse than the returns on the sold securities, implying that the trades of mutual fund managers do not erode performance. The disposition bias, i.e. the reluctance of investors to sell losing stocks, is tested by the widely accepted methodology of Odean (1998).