Behavioral Bias of Traders: Evidence for the Disposition and Reverse Disposition Effect∗

We find evidence for the disposition effect for buy strategies, but a reverse disposition effect for sell strategies, besides a dependence of the disposition effect on the investor sophistication. The disposition effect also depends strongly on the time horizon of a trading strategy. We develop a model in which informed traders with a behavioral bias and rational traders interact to generate the reverse disposition effect for traders following a sell strategy as well as rational traders responding to the behavioral bias of other traders.