Moored Minds: An Experimental Insight into the Impact of Anchoring & Disposition Effect on Portfolio Performance

We present evidence of the anchoring bias and disposition effect (DE) in investor trading decisions across different asset markets (stable and volatile assets) and market scenarios (stable and volatile markets), as well as how these biases affect investors' portfolio performance. The study employs a quasi-experimental design, allowing subjects to engage in interactive trading with four securities, two with potential negative returns and two with potential positive returns, within a simulated asset market. Our findings reveal the presence of the disposition effect and anchoring bias among individual investors in India. Second, market scenarios or volatility can influence the investors’ behavioral biases. The disposition effect was more prominent in volatile markets and the total market, while the anchoring bias was significant in stable and total markets. Additionally, investors exhibiting the disposition effect exhibit lower portfolio performance, while those demonstrating anchoring bias perform relatively better. The study's findings can help individual investors understand their behavioral biases, avoid them in future trading decisions, and improve portfolio performance. Financial institutions and regulatory agencies could identify investment products and supportive investor interactions towards better market trade decisions.