Essays on investor behavior

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Texas Tech University

This dissertation is composed of two essays on individual investor behavior. In the first essay, I analyze a behavioral bias widely known as ‘disposition effect’. By using individual investor trades made through a discount broker between January 1991 and November 1996, I provide a belief-based explanation built on expectations for disposition effect. I use proxies for expectations on future stock prices as control variables and show that disposition effect is concentrated in stocks where there is relatively a larger upward potential. This paper complements the existing literature on the disposition effect by providing evidence based on beliefs, rather than preferences. In the second essay, I extend the analysis to include public signals. Specifically, I examine the effect of analyst recommendations on the trading behavior of individual investors in a portfolio setting. It is widely documented that small investors fail to correct for the positive bias in analyst recommendations. I analyze this issue and claim that perceived upside potential and overconfidence along with the unrealized gain/loss in the stock position might cause different trade reactions to a given stock recommendation.

Analyst reccommendations, Disposition effect, Individual investor