Stock Market Entry Timing and Retail Investors' Disposition Effect

Objective
This study aims to examine the existence and intensity of the disposition effect among individual investors in the Iranian stock market. The disposition effect refers to the tendency of investors to sell winning stocks (stocks with gains) and hold losing stocks (stocks with losses). This behavioral bias can lead to suboptimal decision-making in the market and reduce investors' profitability. The primary objective of this research is to analyze the factors that influence this behavior and to investigate the relationship between market conditions, investors' timing of entry into the market, and the intensity of the disposition effect. Specifically, the study seeks to answer whether factors such as market returns, volatility, and economic uncertainty increase the likelihood of individual investors exhibiting the disposition effect. The study is based on the hypothesis that investors who enter the market during periods of uncertainty and high volatility are more likely to display this behavioral bias.
 
Methods
This research utilizes detailed trading data of individual investors. The data includes transaction records such as the date, direction, price, and volume of each trade, as well as personal information of the investors, such as age, gender, trading experience, and total account balance. To analyze the disposition effect and assess its intensity among individual investors, survival analysis and regression models are employed. The survival analysis method allows researchers to track the timing of investors' entry into the market and examine how it influences their behavior over time. Additionally, regression models are used to explore the relationship between market-related variables and personal characteristics of investors with the intensity of the disposition effect. These models help researchers understand how factors such as market volatility, market returns, and other economic indicators influence emotional and irrational decision-making among investors.
 
Results
The results of the analysis indicate that individual investors who enter the market during periods characterized by low market returns, high volatility, and economic uncertainty are more likely to display the disposition effect. In other words, during times of market instability and heightened economic uncertainty, these investors tend to hold on to losing stocks and sell winning stocks at a higher rate. This finding highlights the significant impact that market conditions have on investors' emotional and irrational decision-making processes. Investors are more prone to making behaviorally driven decisions based on fear and anxiety during periods of economic uncertainty, which ultimately leads to a reduction in their overall returns. Furthermore, the findings suggest that investors' trading experience and personal characteristics such as age and gender can also influence the intensity of the disposition effect.
 
Conclusion
This study demonstrates that the disposition effect not only exists among individual investors but is also influenced by market conditions and personal characteristics. Specifically, investors tend to display a stronger disposition effect during periods of low market returns, high volatility, and economic uncertainty. These results can help investors and policymakers better understand the impact of behavioral factors on investment decision-making and, as a result, adopt more effective strategies to manage emotional biases among investors. Additionally, this research underscores the importance of education and awareness in mitigating the effects of behavioral biases in financial decision-making, thus preventing irrational and detrimental decisions in the market.