The disposition effect is the tendency of investors to sell assets that have risen in value too early, locking in gains, while holding on to assets that have fallen in value for too long, in the hope of avoiding a loss. The term was coined by the economists Hersh Shefrin and Meir Statman in a 1985 paper, which linked the pattern to loss aversion and prospect theory, arguing that investors feel the pain of a realized loss more strongly than an equivalent unrealized loss, and so avoid selling losing positions even when doing so would be the more rational financial decision. The effect has been documented in studies of real brokerage account data and is considered one of the more robust findings in behavioral finance research on individual investor behavior.
Facts
Core ClaimThe disposition effect is the tendency of investors to sell winning positions too early and hold losing positions too long. 1 First Described Year Classification
Type of Phenomenon Sources
1. Wikipedia: Disposition Effect
WikipediaLead paragraph
The disposition effect is the tendency, or disposition, of investors to sell their winning positions too early and to hold their losing positions too long.
Shefrin and Statman's 1985 study section
In a 1985 paper, Hersh Shefrin and Meir Statman coined the term disposition effect and analyzed the psychology underlying its associated behavior.
lead section, phenomenon-kind classification
The disposition effect is the tendency, or disposition, of investors to sell their winning positions too early and to hold their losing positions too long.
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