The Disposition Effect

Research across millions of brokerage accounts reveals the same pattern everywhere: investors sell winning positions too soon and hold losing positions too long. This is not random error. It is a systematic behavioural bias with a name, and understanding it can meaningfully improve your returns.

Why This Matters

The disposition effect, documented by Shefrin and Statman in 1985 and confirmed across every market studied since, describes investors' strong tendency to realise gains quickly and defer losses indefinitely. It is directly caused by prospect theory: the psychological pain of realising a loss is approximately twice as powerful as the pleasure of realising an equivalent gain. So investors delay loss realisation to avoid that pain, and accelerate gain realisation to "lock in" the pleasure — both at the direct cost of long-term returns.