Psychology › Thinking, memory & biases › Loss aversion
Disposition effect: selling winners, holding losers
1985· Finding or experiment
Well replicatedStrong, repeated evidence.
Investors tend to sell rising stocks too soon and hold falling ones too long.
See it on the Psychology map →What it says
Hersh Shefrin and Meir Statman named it in 1985. Terrance Odean's 1998 study of 10,000 US brokerage accounts found investors about 50% more likely to sell a winner than a loser, and the winners they sold went on to beat the losers they kept. Selling a loser makes a paper loss real, so people wait to 'get back to even'. Home sellers show it too: Boston condo owners facing a loss in the 1990s listed higher and waited longer.
Why it matters
It costs twice: winners are cut off early, losers drag on, and in taxable accounts realizing losses would often lower the tax bill.
Think of it like
Like selling your best-performing building and keeping the half-empty one to avoid admitting the loss.
The evidence
Well replicated in brokerage records from the US, Finland, China and elsewhere, and in lab trading experiments; weaker among experienced and professional investors but rarely absent.
Open questions
Its cause is debated: loss aversion alone does not cleanly predict it, and regret, mental accounting or a simple pleasure in cashing gains may matter.
Connections (2)
▸Disposition effect: selling winners, holding losers is usually traced to Loss aversionWell replicated
The connection
Investors measure each stock against their purchase price. Below it, selling makes a loss final, and prospect theory says people take risks to avoid locking in losses, so they hold and hope. Above it, they lock in the gain. Shefrin and Statman also pointed to mental accounting and regret.
Who showed it and when
Hersh Shefrin and Meir Statman, Journal of Finance, 1985; tested on brokerage records by Terrance Odean in 1998.
The evidence
Brokerage records worldwide match the pattern; in a 1998 lab study the effect shrank when holdings were automatically sold and reset, removing the purchase price.
Open questions
Models show loss aversion alone does not reliably predict it (Barberis and Xiong, 2009); a pleasure from realizing gains may explain it better.
▸Disposition effect: selling winners, holding losers is linked to Mental accountingWell replicated
The connection
Investors treat each stock as its own mental account, judged against its purchase price. Selling a winner closes the account at a gain, which feels good; selling a loser books a painful loss, so they wait to 'get back to even'. Hersh Shefrin and Meir Statman named this the disposition effect, explaining it with mental accounting and loss aversion.
Who showed it and when
Shefrin and Statman, Santa Clara University, 1985; confirmed by Terrance Odean's 1998 study of 10,000 accounts at a US discount brokerage.
The evidence
Odean found investors sold winners about 1.5 times as readily as losers, even though the winners they sold went on to beat the losers they kept.
Open questions
Exactly why it happens: mental accounting, loss aversion, regret, or a belief that prices will bounce back; researchers still debate the mix.