What this lesson is about
A precise, heavily studied pattern that flips smart investing logic upside down. And traces directly back to loss aversion working exactly as designed.
Part 1 of 2
The disposition effect is a strange pattern in how investors sell. You might sell winning stocks too soon, locking in gains, but hold onto losers for too long, hoping they'll bounce back. The term comes from a 1985 study by Hersh Shefrin and Meir Statman called "The Disposition to Sell Winners Too Early and Ride Losers Too Long". Many studies since have confirmed this behavior in real trading.
This relates to loss aversion, which we discussed earlier. When you sell a losing stock, you’re making that loss real. Until then, it only existed on paper. That moment can feel very painful, so you might hang on and hope for a turnaround. Selling a winner, on the other hand, feels good. You lock in a gain and avoid that painful moment. Even if the facts suggest you should keep holding, it’s tempting to take the win before it slips away.
Quick check
What is the disposition effect?
The disposition effect describes a specific, asymmetric pattern in selling behavior - quick to sell winners, slow to sell losers - documented extensively in real trading data.
Part 2 of 2
Quick check
Which researchers are credited with naming and popularizing the "disposition effect" in a widely cited 1985 paper?
Shefrin and Statman's 1985 paper, "The Disposition to Sell Winners Too Early and Ride Losers Too Long," is the foundational, named source for this specific pattern.
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