The role of market entry time in strengthening or weakening the investors' Disposition Effect

Purpose: This study aims to explore the presence and magnitude of the Disposition Effect among individual investors. The Disposition Effect is a behavioral finance phenomenon where investors exhibit a preference for selling assets that have appreciated in value while holding onto those that have depreciated. This behavior can lead to mispricing of assets and disrupt market efficiency, as investors' decisions are influenced by cognitive biases and emotional responses. Understanding whether the timing of investors' entry into the market affects the intensity of the Disposition Effect is crucial for improving investment strategies and market performance. By examining this relationship, the study seeks to provide insights that can enhance investor decision-making and contribute to more efficient market outcomes.
Method: The target population for this study consists of all individual shareholders in the Iranian capital market, specifically those whose trading data was recorded from the beginning of July to the beginning of December 2022. To achieve the research objectives, trading data related to individual investors were collected, including details such as transaction dates, direction, price, and volume, alongside personal information such as age, gender, trading history, and account balance. This data was utilized to examine the behavioral biases effect.For sampling purposes, investor entry data into the market were categorized into sub-samples based on monthly market returns, volatility, and economic instability indicators. To analyze the data, various statistical methods were employed, including survival analysis and the Kaplan-Meier model. Survival analysis was used to evaluate the duration during which investors are affected by behavioral biases, particularly under different market conditions. The Kaplan-Meier model facilitated the analysis of the distribution of the lifespan of behavioral biases among investors and examined how the timing of market entry and market conditions influence the intensity of these effects.
Findings: The study’s findings indicate that investors exhibit a pronounced Disposition Effect, especially during the early stages of their market involvement and under adverse market conditions. Specifically, new investors are more likely to retain stocks that are performing poorly and sell those that have generated positive returns. Adverse conditions include periods characterized by lower overall market returns, higher levels of market volatility, and increased economic uncertainty. The results suggest that investors who enter the market during such challenging periods are more susceptible to these behavioral biases. Additionally, investors with more extensive trading experience tend to show less pronounced Disposition Effect, suggesting that experience may play a mitigating role in this behavioral tendency. These findings underscore the psychological and cognitive factors influencing investment behavior, particularly in response to market conditions.
Conclusion: The results of this study highlight the significance of understanding the Disposition Effect and its relationship with the timing of market entry. Investors, particularly those who are new to the market and are dealing with unfavorable conditions, are more likely to exhibit the Disposition Effect. This understanding can be valuable for financial managers and investment advisors, who can leverage these insights to develop strategies aimed at improving investment decisions. These strategies may include educational programs for new investors and tailored advice to mitigate the impact of behavioral biases. Furthermore, the study's insights can assist policymakers in designing interventions to enhance market efficiency by addressing and managing the adverse effects of behavioral biases. Ultimately, improving awareness and management of the Disposition Effect can contribute to more.