REVIEW ON DISPOSITION EFFECT IN STOCK MARKET

Abstract

Bias is a human tendency that affects behavior and perspective based on predetermined mental notions and beliefs. Biases appear across many areas of life and are extremely present in investing. Investor behavior deviates from logic and they display many behavior biases that influence their decision-making process. When investors act on a bias they don’t explore full issue and can be ignorant to evidence that contradicts their initial opinions. This prevent investors from taking rational decisions. Studies have proven the fact that psychological factors have relationships and impacts on the decision making of investors in stock market.

        One such bias is Disposition effect. It is a kind of anomaly found in Behavioural Finance. It refers to the tendency of investors to keep assets that have decreased value and to sell assets that have increased value. The effect was identified by Hersh Shefrin and Meir Statman in 1985. Investors sell stocks that have risen value and keep the stocks that have decreased value. This study aims to find the extent to which the behavioral biases affect individual investor’s investment decisions, the various factors that affects and also to find whether the behavioral biases decrease when investor sophistication increases from individual investors to institutional investors.