Are Investors Reluctant to Realize Their Losses?
Read the paperopens doi.org in a new tab
What they found
Odean tested the disposition effect on the trading records of 10,000 discount-brokerage accounts from 1987 to 1993. On any given day, investors were about 50% more likely to sell a stock trading at a gain than one trading at a loss, except in December when tax-loss selling reversed the pattern. This was not rational rebalancing or information: the winners investors sold went on to outperform the losers they kept by about 3.4 percentage points over the following year. The disposition effect cost investors both in taxes and in returns.
What you can use
- Investors sold winners far more readily than losers, and the winners they sold subsequently beat the losers they kept.
- Holding losers is doubly costly: you forgo the tax benefit and you hold the worse-performing stock.
- The effect is not about information or portfolio rebalancing; it is psychology.
Caveats
1990s discount-broker data; the effect is well replicated but its size varies by investor sophistication and market. Odean measures propensity to sell, not the profitability of individual traders.
Tags: behavioral, disposition-effect, brokerage-data, taxes
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.