Disposition effect
Holding losers and selling winners, because closing a loss makes it final. It is loss aversion showing up in a trading record.
Where you will meet it
Disposition effect appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Set out the behavioural biases that investors commonly show
“Loss aversion makes a loss hurt more than an equivalent gain pleases, which is why losing positions are held and winning ones sold — the disposition effect.”
- Discuss how behavioural factors shape the decisions of an investment team and propose ways to limit their influence
“Groupthink and conformity suppress dissent, especially when a senior member speaks first; overconfidence and the illusion of control encourage concentrated bets; confirmation bias filters evidence toward existing views; anchoring ties forecasts to earlier numbers; loss aversion and the disposition effect delay selling losers; and herding pulls the team toward consensus positions.”
- Explain the disposition effect and loss aversion
“The disposition effect follows: winners are sold too early to lock in the good feeling, losers held too long to postpone the bad one.”
See also
Practise it
Practise disposition effect until it is automatic: questions that explain every wrong option.
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