Where does disposition effect collide?

The tendency of investors to sell assets that have gained value too soon while holding onto assets that have lost value for too long, judged against the price each was bought at. Shefrin and Statman's 1985 The disposition to sell winners too early and ride losers too long named the pattern and explained it by stitching together four ideas: a value function that is concave over gains and convex over losses, a mental account opened at the purchase price and closed only when the position is sold, an aversion to the regret of admitting a loss, and a failure of self-control. The referent is a documented trading bias about when people close positions, and every meaning below is the same bias seen through a different lens, not a separate phenomenon.[1]

Unit

A decision to sell or keep one position, weighed against its purchase price

Recovery means

Ignoring the purchase price and using pre-set selling rules can blunt the bias by removing the reference point that anchors it

Measured by

Formalised as a higher rate of selling from positions that are up than from positions that are down

The same bias shown in the real trades of ordinary investors rather than in theory. Odean's 1998 Are investors reluctant to realize their losses? examined ten thousand household brokerage accounts and compared the proportion of paper gains that were sold with the proportion of paper losses that were sold, finding that investors locked in gains far more readily than losses, except in December when tax motives briefly reversed the pattern. The referent is the field footprint of the disposition effect, measured from account records, and it is the empirical counterpart to the theory above and the laboratory result below, not a different bias.[2]

Unit

A realized-gains rate set against a realized-losses rate across many accounts

Recovery means

Not applicable

Measured by

Captured by the proportion of gains realized versus the proportion of losses realized, computed from each account's holdings and sales

The same bias produced under controlled conditions, where the true odds are known and confounds can be stripped away. Weber and Camerer's 1998 The disposition effect in securities trading had subjects trade risky assets over many rounds and observed that they sold winners more often than losers relative to the purchase price, and that the effect largely vanished when the experiment automatically sold every holding each period and let people rebuy. The referent is the disposition effect isolated in a laboratory market, which rules out taxes, transaction costs, and private information as the cause, and confirms the field pattern that Odean measured.[3]

Unit

A choice to sell or hold each artificial asset within a trading round

Recovery means

Forcing an automatic sale each period removes the effect, showing it lives in the choice to sell rather than in the wish to hold

Measured by

Counted as sales of assets trading above their purchase price versus sales of those trading below it

The same bias as named on the trading desk, before academics measured it. In his 1982 broker's manual The art of selling intangibles, Leroy Gross described get-evenitis: the client's refusal to sell a losing position until it climbs back to the price they paid, so they can get out even rather than admit a loss. Shefrin and Statman drew on this practitioner lore when they built the formal account. The referent is the folk name for the reluctance to realize losses, rooted in observed client behaviour rather than in a value function, and it points at the very same conduct the other meanings study.[4]

Unit

An investor's wish to hold a loser until it returns to the buy price

Recovery means

Not applicable

Measured by

Described qualitatively from brokerage experience, and later pinned to the break-even price as the reference point