Aim of this paper is to present one of biases of behavioral finance and a current example from ISE.
Disposition effect measures tendency of selling behavior as time. Investors behave differently to increase and decrease of price movements. For example, investors have tendency to hold in a decrease in contrast to sell in an increase. Especially, investors are more sensitive to decreases in prices because they believe to gain back of their losses.
According to Prospect Theory of Kahneman, theory of value function includes both concave and convex shapes. Positive area or gains are concave and losses are convex shaped. Investors thinks that decreased prices can be back to reference price so prefers to hold rather than selling like increased price.
Application of one stock
I observed buying-selling behavior related to disposition effect for DO-CO stock (DO-CO Restaurant) in a portfolio game. I bought DOCO when its price was 64 Turkish Liras. When ISE 100 index were decreasing, its price was increasing to 68,5 Turkish Liras so I sold this stock. In this stock, I faced disposition bias because of suddenly sale of stock.
Reference:
Odean, T. "Are Investors Reluctant to Realize Their Losses?"
