Irrational Beliefs May Drive the Disposition Effect: Evidence from Financial Professionals

We administer a theory-driven, lab-in-the-field experiment to study the disposition effect among financial professionals. Our novel design identifies, at the individual participant level, key behavioral drivers of the disposition effect: reference-dependent risk attitudes (“tastes”), second-order uncertainty attitudes (including “ambiguity”), and subjective likelihood assessments (“beliefs”). Among the 237 professionals in our sample, 34% exhibited the disposition effect,
which seems to be primarily driven by non-Bayesian beliefs. Our experimental results suggest that, when faced with new information about their asset’s performance, financial professionals failed to update their beliefs sufficiently, leading them to sell the asset that gained (lost) value more (less) readily.