Disposition effect

The tendency of investors to sell assets that have gained value too soon while holding assets that have lost value too long. It reflects asymmetric responses to gains and losses relative to an asset’s purchase price.

Prospect theory: A theory of decision-making under risk in which people evaluate outcomes relative to a reference point and feel losses more strongly than equivalent gains. Its loss aversion and reference dependence help explain reluctance to sell losing investments.
Odean's disposition effect study: Terrance Odean’s analysis of individual brokerage accounts, published in 1998, documenting investors’ tendency to realize gains more often than losses. This study established the effect using a large sample of actual investor trades.
Portfolio rebalancing: Adjusting portfolio holdings to restore desired asset weights or risk exposure. Holding losing assets can leave a portfolio increasingly unlike its intended allocation.
Status quo bias: A preference for keeping existing conditions unchanged, even when alternatives may be better. Holding a losing asset can resemble inaction driven by a general preference for the status quo.
Loss aversion: The tendency to weigh losses more heavily than gains of comparable size. Realizing a loss can feel especially costly, encouraging investors to keep losing assets.
Realized gains and losses: Investment profits and losses made final by selling an asset or otherwise closing a position. The effect is measured by comparing how often investors realize gains and losses.
Momentum investing: An investment strategy that buys assets with strong recent performance and sells those with weak performance. The effect can prompt investors to sell recent winners and retain recent losers, opposite to momentum trading.
Endowment effect: The tendency to value an object more highly merely because one owns it. Overvaluing an owned asset can reinforce reluctance to sell it at a loss.
Mental accounting: The tendency to categorize and evaluate money in separate, often inconsistent, mental accounts. Investors may judge each asset against its purchase price as a separate account.
Individual investor: A person who invests personal funds, typically outside an institutional investment mandate. The classic evidence for the effect comes from individual brokerage accounts.

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