An Examination of the
Relationship between the
Disposition Effect and Gender,
Age, and Product Type
Presenter: Teng Yuan Cheng
Abstract
• We analyze how internal characteristics and
an external factor are related to the
disposition effect
• Internal characteristics:
• one is gender, remains fixed over the lifetime.
• The other is age that changes over the lifetime.
• External factor is product type: electronic- and
financial-sector index futures contract.
Abstract
• Electronic sector: ever-changing nature,
compete with the world-wide competitor.
• Financial sector: more conservative investors,
compete mostly domestically.
Abstract
• We show that women and mature
traders, compared with their male and
younger counterparts, exhibit a stronger
disposition effect.
• The effect is also stronger among traders
who trade the financial-sector futures
contract than those who trade the
electronic- sector futures contract.
Internal biological
characteristics:
gender and age
Behavioral bias:
disposition effect
External factor:
two specific
types of futures
products
Introduction
• Rules from Commodity Research Bureau (CRB),
the most familiar ones for the successful
traders are “cut your losses short” and “let
profits run.
• But most of investors behave just the opposite.
They exhibit the disposition effect, the
tendency to hold onto losses too long but
realize gains too readily.
Introduction
• Going beyond the aggregate investor
approach, we track the trade-by-trade history
of each individual,
• How variations in internal biological
characteristics such as gender and age affect
trader’s behavior
Introduction
• We further investigate how external factors
also play a role in the disposition effect.
• The electronic sector index versus financial
sector index futures —with different volatility
nature and attract different traders.
Literature Review
•
•
•
•
Disposition Effect (in stock market)
Kahneman and Tversky (1979)
Shefrin and Stateman (1985)
Odean (1998), Barber and Odean (2000), and Dhar and
Zhu (2006) look at retail investors of a US discount
brokerage house
• Garvey and Murphy (2004) examine 15 proprietary
stock traders,
• Feng and Seasholes (2005): individual level
• Barber et al. (2007) analyze four types of investors
(individuals, corporations, dealers, and foreign
investors) in Taiwan;
Literature Review
• Disposition Effect
• Relatively few in futures market:
• Heisler (1994) (retail), Locke and Mann (2005)
(professional floor) and Frino et al. (2004)
(local traders)
• Frino et al. (2004), Locke and Mann (2005),
Literature Review
• Gender issue:
• Barber and Odean (2001) and Agnew et al. (2003) that
men trade more actively than women,
• A large amount of research in sociology and psychology
has revealed gender differences in the perception of
risk associated with risky behaviors, various hazards,
and dangerous activities (e.g., Spigner et al. (1993),
Flynn et al. (1994), Boverie et al. (1995) etc.
• Campbell (2006) for an extensive review of the
literature on gender differences in investor behavior.
Literature Review
• Age issue:
• Risk tolerance decreases with age, Mclnish
(1982) and Hallahan et al. (2004).
• Xiao and Anderson (1997) and Donkers and
Van Soest (1999) find a positive relationship.
• Many other studies (e.g., Cutler (1995),
Sunden and Surette (1998), and Van de Venter
and Michayluk (2009) find little or no
relationship
Data
• Tracking the trade-by-trade transaction
histories, individual traders on the Taiwan
Futures Exchange.
• Two different characteristic underlying assets:
Electronic and Financial Sectors, mature
between January 2003 and December 2004.
Data
• In total, there are 65,631 traders trading TE
and 71,896 trading TF.
• We further require that the traders trade
more than ten days over the sample period
and have more than ten roundtrips.
• 18,172 TE traders and 22,950 TF traders meet
these criteria.
Methodology
• We calculate, after each trade, all the
necessary statistics such as the open interests
(OIs), weighted average costs, and realized
and unrealized gains/losses.
• We exclude institutional and proprietary
traders and focus only on trades that are
executed by individual traders.
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Methodology
• Originate from Odean (1998) proportion of
gains realized (PGR) and proportion of losses
realized (PLR)
• We construct the proportion of offsets that
result in a realized gain, called proportion of
positive offset (PPO),
• and proportion of offsets that lead to a
realized loss, called proportion of negative
offset (PNO).
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Methodology
• By examining PPO and PNO at individual level we can
further investigate whether and how it varies among
traders.
• If PPO>PNO，the disposition effect exists, the trader
is more inclined to offset her position when doing so
results in a realized gain while loath to offset if it
leads to a realized loss.
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PPOt 
# of _ offset realized gain contractst
open _ int errest t 1
when there is a realized gain at t
PNOt 
# of _ offset realized loss contractst
open _ int erest t 1
when there is a realized loss at t
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2/30=0.067
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1/130=0.008
Result
• Female traders show stronger disposition
effect tendency than male traders
• Mature traders show stronger disposition
effect tendency than younger traders
• Financial futures traders show stronger
disposition effect tendency than electronic
futures traders
Regression Tests of the Relationship
between Disposition Effect and
Trader’s Characteristics and External
Factor
Model:
Disposition_effect=β0+∑βi*trading_variable
+∑δj*internal_characteristics+∑ηk*product_type
Variables
• Note:
• Disposition Effect = PPO – PNO.
• Profit Per Contract = Cumulative net trading profit ( after
transaction cost) over total trading volume
• Volume Per Day = Total trading volume over trading days
• Tenure = last trading date less open account date (by months)
• Age = trader’s age in years from birth date to the last trading date in
years
• Gender = 0 for male; 1 for female.
• DTE-TF =0 for trading TE; 1, TF
• DBoth= 0 for trading only TE or TF; 1 for trading both TE and TF
• Dprofit=0 for profitable traders; 1, loss traders
Result
• Volume per day: negative impact on
disposition effect
• Tenure is not a significant factor in this test.
• Age: Mature traders show stronger
disposition effect tendency than younger
traders
• Gender: Female traders show stronger
disposition effect tendency than male traders
Result
• DTE-TF : Financial futures traders show stronger
disposition effect tendency than electronic
futures traders
• Dboth: Traders who trade both electronic and
financial futures show stronger disposition
effect tendency than those who trade only
one futures
• Thank you for your listening.
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