Disposition Effect Among Contrarian and Momentum Investors

We provide evidence of disposition effect propensity for stock trading simulation participants employing a contrarian versus a momentum strategy. We found that even subjects playing with chips rather than real money remain vulnerable to those effects. Both tendencies were generally evident in our sample, but we also found individual differences. Subjects seemed to be contrarians both on position opening and on position closing. The main hypothesis of this paper states that contrarian investors are more prone to the disposition effect than are momentum traders. The model proposed by Dacey and Zielonka [2008] plays a crucial role in formulating this hypothesis. We consider the disposition effect not only in terms of the value function but also of the probability weighting function. In accordance with our hypothesis, we found that contrarian traders are more prone to the disposition effect. We provide evidence of disposition effect propensity for stock trading simulation participants employing a contrarian versus a momentum strategy. We found that even subjects playing with chips rather than real money remain vulnerable to those effects. Both tendencies were generally evident in our sample, but we also found individual differences. Subjects seemed to be contrarians both on position opening and on position closing. The main hypothesis of this paper states that contrarian investors are more prone to the disposition effect than are momentum traders. The model proposed by Dacey and Zielonka [2008] plays a crucial role in formulating this hypothesis. We consider the disposition effect not only in terms of the value function but also of the probability weighting function. In accordance with our hypothesis, we found that contrarian traders are more prone to the disposition effect.