The disposition effect was discovered in the field of behavioural finance.
Wait, before your eyes glaze over this is important!
It demonstrates the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value. Or in plain terms, why you sell your profitable trades and hold onto your losing trades.
Surely that goes against everything you believe? Surprisingly not…
Hersh Shefrin and Meir Statman identified and named this effect, which found that people dislike losing significantly more than they enjoy winning. Let’s put it a slightly different way, the emotional strength of losing is so much more powerful than the joy of winning. It has a much deeper effect on an individual to the point where they can subconsciously prefer the challenge of enduring losing trades!
This is the Disposition Effect.
The disposition effect has been described as “one of the most robust facts about the trading of individual investors” because investors will hold stocks that have lost value yet sell stocks that have gained value, over and over again.
It’s important to be aware of it, because you can change the outcome. But when do you sell your winners?
This is what we have Dave for, enjoy the video!