DEFINITION
Disposition Effect
The tendency to sell winners too early and hold losers too long. One of the most documented behavioral biases in retail trading.
In depth
Coined by economists Shefrin and Statman in 1985. The fix is mechanical: predefined stops and targets, with no manual exits before either is hit (unless a structural reason invalidates the trade thesis).
Related terms
Loss Aversion
The psychological tendency to weigh losses as roughly twice as painful as equivalent gains. Causes traders to hold losers and exit winners prematurely.
Sunk Cost Fallacy
Continuing to hold a losing trade because of capital already invested, rather than evaluating the trade on its current merits.
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