Asymmetric responses to winning and losing investments
Investors’ tend to hold losers too long hoping to break even and selling winners too early to log the win.
Ironically, this disposition is called the disposition effect. The disposition effect is part of Prospect Theory: the Nobel prize-winning work of Daniel Kahneman and Amos Tversky
Disposition Effect is also a driver of momentum.
Sources of mention of the Disposition Effect:
‘The second paper, by Meir Statman and me, applied Kahneman and Tversky’s notion of framing to the realization of loses. We called this phenomenon the disposition effect, arguing that investors are predisposed to holding losers too long and selling winners too early. Shefrin (2000), page 8
‘Meir Statman and I (Shefrin and Statman 1985) coined the term disposition effect, as shorthand for the predisposition toward get-evenitis.’ Shefrin (2000) page 107
‘Shefrin and Statman (1985) predicted that because people dislike incurring losses much more than they enjoy making gains, and people are willing to gamble in the domain of losses, investors will hold on to stocks that have lost value (relative to the reference point of their purchase) and will be eager to sell stocks that have risen in value. They called this the disposition effect. Montier (2002) pages 23–24
‘Avoiding regret and seeking pride affects people’s behavior, but how does it affect investment decisions? This is called the disposition effect.’ Nofsinger (2001) page 47
