The systematic bias of selling winners too early (to lock in gains) and holding losers too long (to avoid realising losses) — the combined result of loss aversion and mental accounting.
Deeper Explanation
Shefrin and Statman documented the disposition effect: investors on average hold losing stocks for 124 days and winning stocks for 104 days — the opposite of what rational tax management and return optimisation would suggest. The result is a portfolio that progressively accumulates losers while shedding winners — the least efficient collection of investments. The correction requires separating the emotion of loss from the analytical question: given current information, is this position worth holding? Tax-loss harvesting exploits the disposition effect by deliberately selling losers to offset gains — turning an irrational tendency into a tax advantage.
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