Measuring Disposition Bias in U.S. Equity Mutual Fund Managers

Summary

The document summarizes research on the disposition effect among actively managed U.S. equity mutual funds: managers may sell winning stocks too readily while holding losing stocks. It describes a measurement based on quarterly changes in reported holdings and a weighted average purchase price. Realized gains and losses are compared with paper gains and losses; the difference between the proportions realized is used as a disposition-bias measure. The method assumes trades occur at quarter end, a simplifying assumption driven by holdings data limitations.

The reported sample covers U.S. funds from 1980 to 2010. Its main findings are that managers, on average, exhibit a positive disposition bias and that the measured tendency is associated with stock characteristics. Greater valuation uncertainty and higher market beta are linked to stronger bias; dividend-related characteristics are also discussed. The summary also reports differences across funds and a decline in the effect over time. These are historical associations from one market and period, not proof of causation or a general trading rule. The study examines one behavioral bias and focuses on equity mutual fund holdings.

Key ideas

• The disposition effect describes a tendency to realize gains sooner than losses.
• The study estimates disposition bias by comparing proportions of realized gains and losses with paper gains and losses.
• Its holdings-based method assumes trades occur at quarter end and uses weighted average purchase prices as reference points.
• The historical U.S. mutual fund sample shows a positive average disposition bias that varies across funds.
• Higher valuation uncertainty and beta are associated with stronger disposition bias in the reported analysis.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.