How to lessen the disposition effect? It pays to study before investing

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In this chapter, we demonstrate that studying relevant investment information helps reduce individual investors' disposition effect. It is prevalent that many individual investors in stock market do not form their own opinion about the investments; instead they mimic investment strategies of others. This research shows that the intention of making easy money only worsens the disposition effect. We collect 2,632 individual stock investors through nationwide surveys in Taiwan. Using regression models, we examine the effects of study on reducing investors' inclination of holding-losers/selling-winners and the disposition effect. The findings show that investors realize losses sooner and significantly reduce the disposition effect if they choose to learn about their investments. The results also demonstrate that if the investors are willing to learn about firms in which they invest, they become more rational about their investment decisions. They are no longer influenced by the sentiment of regret resistance or misperception of the stock trend, which in turn reduces the disposition effect. This study supports that investors make better investment decisions if they perform necessary due diligence prior to investing. Copyright © 2013 by Emerald Group Publishing Limited.

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Advances in Business and Management Forecasting