Watch for
Selling investments that are doing well while keeping underperformers.
Decision & ChoiceBias #87
Disposition Effect
We sell winners too early and hold losers too long.
The tendency in finance to sell assets that have increased in value too quickly while holding onto losing assets too long.
Why it matters: One of the most documented behavioural biases in finance. Costs investors billions annually.
Try this
Evaluate each holding on future prospects alone ignoring purchase price.
Real-world example
Selling a stock that gained 10% to lock in gains while refusing to sell one that dropped 20% hoping it will recover.
Key researchers
Hersh Shefrin, Meir Statman
First described in 1985
Psychological mechanism
Combined loss aversion and mental accounting. Realising a gain feels good and confirms skill. Realising a loss crystallises regret and threatens self-image so we delay it hoping the market will bail us out.
Seminal research
Hersh Shefrin and Meir Statman (1985), "The disposition to sell winners too early and ride losers too long."
Related Biases
Debrief
Biases are not character flaws. They are recurring patterns in how minds compress uncertainty, save energy, and narrate reality. Once you recognise the pattern, you can slow the decision down, test the assumption, and make space for a better explanation.
Sources
Original ResearchShefrin and Statman (1985) — Original paper
EncyclopediaWikipedia overview