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

Purpose: This study investigates the existence and intensity of the Disposition Effect among individual investors. The Disposition Effect refers to investors’ tendency to sell assets with positive returns while holding onto those with negative returns. This behavioral bias can lead to asset mispricing and reduced market efficiency as decisions are influenced by cognitive errors, psychological factors, and emotional responses. The research focuses on whether the timing of market entry impacts the strength of the Disposition Effect, particularly as market entry is influenced by broader economic and psychological conditions. Understanding these effects can enhance financial decision-making and investment strategies, thereby contributing to improved market performance and stability across diverse conditions.
Method: The statistical population includes all individual shareholders in the Iranian capital market whose trading data were recorded from early July to early December 2022. To achieve the research objectives, trading data were collected, including transaction dates, directions, prices, and volumes, alongside personal information such as age, gender, trading history, and account balances. These data were analyzed to assess the presence and intensity of the Disposition Effect. Investor market entry data were categorized into sub-samples based on monthly market returns, volatility, and economic instability indicators. Statistical methods, including survival analysis and the Kaplan-Meier model, were employed. Survival analysis assessed how long investors remain influenced by the Disposition Effect under varying market conditions, while the Kaplan-Meier model analyzed the distribution of the Disposition Effect’s duration and examined how both market entry timing and prevailing market conditions influence its intensity.
Findings: The findings indicate that the Disposition Effect is particularly pronounced among new investors, especially during unfavorable market conditions. These conditions include periods with lower overall market returns, higher market volatility, and heightened economic uncertainty. New investors exhibited a stronger tendency to hold onto poorly performing stocks and sell stocks with positive returns, reflecting the psychological and cognitive challenges they face during the initial stages of their market involvement. In contrast, investors with greater trading experience demonstrated a reduced tendency toward the Disposition Effect, highlighting the mitigating influence of experience over time. These results underscore the significant role of market conditions and entry timing in shaping investment behavior and behavioral biases across varying investor profiles.
Conclusion: The results emphasize the importance of understanding the Disposition Effect and its relationship with market entry timing. New investors, particularly those entering the market during adverse conditions, are more prone to exhibiting the Disposition Effect, often making suboptimal decisions. These insights can guide financial managers and investment advisors in developing tailored strategies, such as investor education and advisory services, to address behavioral biases and enhance decision-making processes. Additionally, the findings can assist policymakers in designing targeted interventions to mitigate the negative effects of behavioral biases, thereby fostering a more efficient and resilient market environment. Improved awareness and better management of the Disposition Effect can contribute to better investment practices, reduce risks, and enhance overall market stability.