Open Access Open Access  Restricted Access Subscription or Fee Access


Florian Teschner


The disposition effect describes investors’ common tendency of selling a winning investment too soon and holding on to losing investments too long. We analyze the disposition effect in a prediction market for economic indices. We show that the effect for individual traders as well as on an aggregated level. Furthermore we find a significant asymmetry of the disposition effect. The effect can almost exclusively be attributed to the percentage of gains realized (PGR). Additionally we link the aggregated disposition effect and market efficiency. A common hypothesis of the behavioral finance literature is that if participants make systematically biased decisions, market efficiency will suffer. Our setup is well-suited to studying the behavioral aspects of decision making because, in contrast to financial markets (i) the value of shares in our market is ultimately known and (ii) we can measure the participants’ behavioral biases (i.e the disposition effect). Against intuition we find no correlation between the disposition effect and prediction accuracy - a proxy for market efficiency.


prediction markets, disposition effect, market efficiency

Full Text:



K.J. Arrow, R. Forsythe, M. Gorham, R. Hahn, R. Hanson, J. O. Ledyard, S. Levmore, R. Litan, P. Milgrom, F. D. Nelson, G. R. Neumann, M. Ottaviani, T. C. Schelling, R. J. Shiller, V. L. Smith, E. Snowberg, C. R. Sunstein, P. C. Tetlock, P. E. Tetlock, H. R. Varian, J. Wolfers, and E. Zitzewitz (2008, May). “Economics: The promise of prediction markets.” Science 320(5878), 877–878.

J. Berg, R. Forsythe, F. Nelson, and T. Rietz (2000). “Results from a dozen years of election futures market research.” Working Paper.

S. Boolel-Gunesh, M.-H. Broihanne, M. Merli, Investor Sophistication, Learning and the Disposition Effect, in International Conference of the French Finance Association (AFFI), May 2011

K. Chen, C.R. Plott, Information aggregation mechanisms: Concept, design and implementation for a sales forecasting problem, 2002, California Institute of Technology Social Science Working Paper

P.M.W. Chui, An experimental study of the disposition effect: Evidence from Macau. Journal of Psychology and Financial Markets 2, 216–222 (2001)

G. Cici, The Relation of the Disposition Effect to Mutual Fund Trades, 2010. Working Paper.

R. Dhar, N. Zhu, Up Close and Personal: An Individual Level Analysis of the Disposition Effect, 2002. Yale ICF Working Paper No. 02-20

R. Dhar, N. Zhu, Up close and personal: Investor sophistication and the disposition effect. Management Science 52(5), 726–740 (2006)

R. Forsythe, T.A. Rietz, T.W. Ross, Wishes, expectations and actions: a survey on price formation in election stock markets. Journal of Economic Behavior and Organization 39, 83–110 (1999)

R. Garvey, A. Murphy, Are professional traders too slow to realize their losses? Financial Analysts Journal 60(4), 15–18 (2004)

D. Genesove, C. Mayer, Loss aversion and seller behavior: Evidence from the housing market 116(4), 1233–1260 (2001)

T.S. Gruca, J.E. Berg, M. Cipriano, Consensus and differences of opinion in electronic predict tion markets. Electronic Markets 15, 13–22 (2005)

R.W. Hahn, P.C. Tetlock, Introduction to Information Markets, in Information Markets: A New Way of Making Decisions, ed. by R.W. Hahn, P.C. Tetlock (AEI Press, Washington D.C., 2006), pp. 1–12

S.M. Hartzmark, D. Solomon, Effciency and the Disposition Effect in NFL Prediction Markets, 2010. Working Paper.

H.-J. Lee, J. Park, J.-Y. Lee, R.S. Wyer, Disposition effects and underlying mechanisms in e-trading of stocks. Journal of Marketing Research (JMR) 45(3), 362–378 (2008)

J. Linnainmaa, The Individual Day Trader, 2005. Working Paper, UCLA

P. Locke, S. Mann, Professional trader discipline and trade disposition. Journal of Financial Economics 76(2), 401–444 (2005)

S. Luckner, C. Weinhardt, Arbitrage Opportunities and Market-making Traders in Prediction Markets, in Joint Conference on E-Commerce Technology (CEC’08) and Enterprise Computing, E-Commerce and EServices (EEE ’08), July 2008

A. Muerman, J.M. Volkman, Regret, Pride and the Disposition Effect, 2006. PARC Working Paper Series WPS 06-08, University of Pennsylvania

T. Odean, Are investors reluctant to realize their losses? The Journal of Finance 53(5), 1775– 1798 (1998)

D. Richards, J. Rutterford, M. Fenton-O‘Creevy, Do Stop Losses Work? The Disposition Effect, Stop Losses and Investor Demographics, 2011. The Open University Business School, Conference Paper.

D. Rothschild, Forecasting Elections, Public Opinion Quarterly 73(5), 895--916. (2009)

E.S. Rosenbloom, W. Notz, Statistical tests of real-money versus play-money prediction markets. Electronic Markets 16, 63–69 (2006)

E. Servan-Schreiber, Trading Uncertainty for Collective Wisdom, 2012. Lumenogenic Research Report

E. Servan-Schreiber, J. Wolfers, D.M. Pennock, B. Galebach, Prediction markets: Does money matter? Electronic Markets 14(3), 243–251 (2004)

Z. Shapira, I. Venezia, Patterns of behavior of professionaly managed and independent investors. Journal of Banking and Finance 25, 1573–1597 (2001)

H. Shefrin, M. Statman, The disposition to sell winners too early and ride loosers too long: Theory and evidence. The Journal of Finance 40(3), 777–790 (1985)

B. Summers, D. Duxbury, Unraveling the Disposition Effect: The Role of Prospect Theory and Emotions, 2007. Working Paper.

F. Teschner, A. Mazarakis, R. Riordan, C. Weinhardt, Participation, Feedback and Incentives in a Competitive Forecasting Community, in ICIS 2011Proceedings, 2011.

P.C. Tetlock, Liquidity and Prediction Market Effciency, 2008. Working Paper.

F. Welfens, M. Weber, An Individual Level Analysis of the Disposition Effect: Empirical and Experimental Evidence, 2007. Working Paper - Sonderforschungsbereich 504: Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung; No. 07-45

J. Wolfers, E. Zitzewitz, Prediction markets. Journal of Economic Perspectives 18(2), 107–126 (2004)

H. Zuchel, What Drives the Disposition Effect?, 2001. Working Paper – Sonderforschungsbereich 504: Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung; No. 01-39



  • There are currently no refbacks.