Behaviour
Disposition effect
Selling winners too early and holding losers too long.
How it works
Realising a gain confirms a good decision; realising a loss confirms a bad one. People manage the feeling rather than the portfolio.
The effect is well documented in brokerage records across many countries, and it works against returns and tax efficiency simultaneously.
Where it misleads people
It is exactly backwards on tax as well as on momentum. In most systems you want to realise losses and defer gains, which is the opposite of what the instinct produces.
Related terms
- Loss aversionThe tendency to feel a loss roughly twice as intensely as an equivalent gain.
- Tax-loss harvestingSelling a losing holding to realise the loss and offset it against taxable gains.
- AnchoringFixating on an irrelevant reference point, usually the price you paid.
- Sunk cost fallacyContinuing with something because of what you have already put in, rather than what lies ahead.
More in Behaviour
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.