Preferences , Disposition Effect and COVID-19 ∗

We measure preferences and trading behavior during the emergence of the COVID-19 crisis. Firstly, we elicit and estimate present bias, patience, risk and loss aversion, and probability weighting in a large representative online Dutch household panel with high stakes. Impatience and risk seeking behavior increase during the emergence of the COVID-19 crisis. Secondly, we observe a strong disposition effect, which correlates negatively with stock market returns during the emergence of the COVID-19 crisis. Finally, we empirically test the predictions from realization utility (Barberis and Xiong, 2012), but we find little support. Actually, we find the reverse: the probability that an investor sells a stock within a year is a decreasing function of his impatience and of the stock’s volatility, and an increasing function of loss aversion. Additionally, more patient investors allocate more to stocks with low expected returns and higher volatility. ∗We thank Rob van den Goorbergh and Bas Werker for useful comments. †Tilburg University, department of Econometrics and Operations Research. Corresponding author: j.t. g.goossens@uvt.nl ‡Leiden University, department of Economics We measure individual risk and time preferences, and examine the relationship with investment behavior. Firstly, we elicit present bias, discount rates, risk and loss aversion, and probability weighting in a large representative online Dutch household panel using an extended version of the Convex Time Budget method of Andreoni and Sprenger (2012). We analyze how risk and time preferences evolve during the emergence of the COVID-19 crisis. Secondly, we test the disposition effect – the tendency of investors to hold losing investments too long and sell winning investments too early – by a simple experiment (Ploner, 2017) based on realization utility from Barberis and Xiong (2012). Finally, we investigate how individual trading behavior develops during the COVID-19 crisis and whether it behaves in line with the structurally estimated preferences and the theoretical predictions from realization utility. Our first results (on preferences) show that CRRA risk aversion decreased during the emergence of the COVID-19 crisis and subjects also become more impatient, while loss aversion, present bias and probability weighting appear more stable. In addition, we find that preferences are more precisely estimated when including probability weighting in the preference specification. Our second results (on investment behavior) show a strong disposition effect and the disposition effect correlates negatively with stock market returns during the emergence of the COVID-19 crisis. Moreover, we find almost no support for the predictions from realization utility: the probability that the investor sells a stock within a year is a decreasing function of his impatience and of the stock’s volatility, and an increasing function of loss aversion. The more striking hypothesis of realization utility is not supported by our experiment: we find that more patient investors allocate more to stocks with low expected returns and higher volatility. Our contribution is twofold. Firstly, we analyze the stability of risk and time preferences during the emergence of the COVID-19 crisis (i.e. a rare disaster). Secondly, to the extent