00Thaler_FM i-xxvi.qxd

paper gains, realized losses, and paper losses are summed for each account
and across accounts. Then two ratios are calculated:

In the example of Daymon and Rosalie, PGR=1/2 and PLR=1/4. A large
difference in the proportion of gains realized (PGR) and the proportion of
losses realized (PLR) indicates that investors are more willing to realize ei-
ther gains or losses.
Any test of the disposition effect is a joint test of the hypothesis that people
sell gains more readily than losses and of the specification of the reference
point from which gains and losses are determined. Some possible choices of a
reference point for stocks are the average purchase price, the highest pur-
chase price, the first purchase price, or the most recent purchase price. The
findings of this study are essentially the same for each choice; results are re-
ported for average purchase price. Commissions and dividends may or may
not be considered when determining reference points or profits and losses.
Although investors may not consider commissions when they remember

Proportion of Gains Realized (PGR)

Realized Gains

Realized Gains + Paper Gains

Proportion of Losses Realized (PLR)

Realized Losses

Realized Losses + Paper Losses

=

=

INDIVIDUAL INVESTORS 547

Table 15.1

Example of Calculation of Proportion of Gains Realized (PGR) and

Proportion of Loses Realized (PLR)

Daymon Rosalie

Panel A: Positions

Holdings A, B, C, D, E F, G, H

Winners A, B F, G

Losers C, D, E H

Panel B: Sales

Sales on Monday A and C none

Sales on Wednesday none F

Panel C: Calculation of Gains and Losses

Paper Gains 1(B) 1(G)

Paper Losses 2(D and E) 1(G)

Realized Gains 1(A) 1(F)

Realized Losses 1(C) 0