What is the disposition effect in simple terms?

Selling winning stocks quickly while holding losing ones to avoid admitting a loss.

It is often tax-inefficient and the winners sold tend to keep outperforming.

Disposition Effect

📈 Economics By CampusDown Wiki Editorial Team Last updated October 27, 2026

The disposition effect is the tendency of investors to sell assets that have risen in value to lock in gains while holding assets that have fallen, reluctant to realise losses. It persists despite tax and return disadvantages and is a signature finding of behavioural finance.

Contents

1. Concept and explanations
2. Evidence
3. Market effects and debate
4. FAQ
5. References

Concept and explanations

Shefrin and Statman (1985) named the tendency and explained it with prospect theory, mental accounting and regret aversion.

Evidence

Odean (1998) found investors realise gains far more readily than losses, and winners sold outperformed losers held. Weber and Camerer (1998) replicated it experimentally, making it a staple of behavioural finance.

Market effects and debate

Grinblatt and Han (2005) linked it to momentum and Frazzini (2006) to underreaction. Barberis and Xiong (2009) showed simple prospect theory struggles to predict it, prompting explanations such as realisation utility and overconfidence.

FAQ

What is the disposition effect in simple terms?: Selling winning stocks quickly while holding losing ones to avoid admitting a loss.
Why is it a problem?: It is often tax-inefficient and the winners sold tend to keep outperforming.

Sources reviewed: 2026-10-26

References

Shefrin, H., & Statman, M. (1985). The disposition to sell winners too early and ride losers too long: Theory and evidence. Journal of Finance, 40(3), 777–790. The paper that named the effect.
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–291. Prospect theory foundations.
Odean, T. (1998). Are investors reluctant to realize their losses? Journal of Finance, 53(5), 1775–1798. Evidence from brokerage accounts.
Weber, M., & Camerer, C. F. (1998). The disposition effect in securities trading: An experimental analysis. Journal of Economic Behavior & Organization, 33(2), 167–184. Experimental evidence.
Grinblatt, M., & Han, B. (2005). Prospect theory, mental accounting, and momentum. Journal of Financial Economics, 78(2), 311–339. Links the effect to momentum.
Frazzini, A. (2006). The disposition effect and underreaction to news. Journal of Finance, 61(4), 2017–2046. Underreaction to news.
Barberis, N., & Xiong, W. (2009). What drives the disposition effect? An analysis of a long-standing preference-based explanation. Journal of Finance, 64(2), 751–784. Questions the standard explanation.

Reports and materials that use this theory (Korean)

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This article was last updated on October 27, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.