Disposition effect

Selling a winner turns a paper gain into a gratifying realized gain. Selling a loser makes the loss concrete and can feel like admitting an error, so people wait for a return to the purchase price. Taxes, trading costs, portfolio rebalancing, and informed beliefs can produce the same trade pattern, which is why the pattern alone is not proof of bias.

• A portfolio contains two otherwise similar shares. One is up 30%, one is down 20%; the investor sells the winner to “bank it” and keeps the loser only because they do not want to make the loss real.
• Before reviewing fundamentals, a trader sets a rule to cut a position at a 10% loss—then shifts the rule when the loss arrives while taking gains at the first sign of relief.
• An investment committee reviews each holding as if it were cash. The question becomes “Would we buy this today?” rather than “Can we get back to our entry price?”

The effect is well documented in many trading datasets, yet its size and performance implications depend on the asset class, investor, tax regime, and benchmark. Researchers must separate psychological reluctance to realize losses from rational selling, private information, and institutional constraints.