The disposition effect is the tendency to sell winners too early and hold losers too long. Shefrin and Statman named it in 1985; Odean later confirmed with real brokerage data (1998) that individual investors are markedly more likely to sell a position that is up than one that is down.
It is exactly backwards from what tends to work. Selling winners early caps your best positions right when they are working, while clinging to losers lets them keep bleeding. The urge is driven by loss aversion: realizing a loss feels like admitting a mistake, while banking a small gain feels safe. In taxable accounts it can also be inefficient, front-loading gains and deferring useful losses.
Let winners run and cut losers by rule, not by feel. A trailing stop keeps you in a rising position while it keeps rising and exits only when the trend actually turns — the opposite of selling early out of nervousness. Pairing that with a predefined exit on losers also guards against overtrading.
It is the documented tendency (Shefrin and Statman, 1985; Odean, 1998) to sell winning positions too early and hold losing ones too long.
It caps your best positions while letting losers keep bleeding, and in taxable accounts front-loads gains and defers useful losses. It is driven by loss aversion.
Let winners run and cut losers by rule — for example a trailing stop that exits only when the trend turns, paired with a predefined exit on losing positions.
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Educational research only — not investment advice.