Patterns of behavior of professionally managed and independent investors

In this paper, we analyze the investment patterns of a large number of clie nts of a major Israeli brokerage house during 1994. We compare the behavior of clients making independent investment decisions to that of investors wh ose accounts were managed by brokerage professionals. Our main objective is to investigate whether the disposition effect (i.e., the tendency to sell winners quicker than losers), demonstrated in the US only for individual in vestors, also holds for professional investors. This analysis is important, as accepted financial theory predicts that prices are determined mainly by decisions made by professionals. We show that both professional and indepe ndent investors exhibit the disposition effect, although the effect is stro nger for independent investors. The second objective of our study is the comparison of trade frequency, vol ume and profitability between independent and professionally managed accoun ts. We believe that these comparisons not only provide insights of their ow n. but also help to put the differences in the disposition effect in a wide r perspective. We demonstrate that professionally managed accounts were mor e diversified and that round trips were both less correlated with the marke t and slightly more profitable than those of independent accounts. (C) 2001 Elsevier Science B.V. All rights reserved.