Disposition Effect
The disposition effect is the habit of selling winners and keeping losers — realizing gains, papering losses, versus a mark-to-market rule.
Definition
Disposition Effect refers to realizing gains, papering losses, versus a mark-to-market rule. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It shows up in factor research, attribution, and capacity debates — whether a return slice is skill, style, or fee drag. When realizing gains, papering losses, versus a mark-to-market rule shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what disposition effect is saying. If realizing gains, papering losses, versus a mark-to-market rule moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Check definition stability across universes, costs, and regimes before treating a backtest as portable. Prefer a short written null hypothesis for Disposition Effect: what would falsify the current reading in the next window?