Quant · Core
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
Shefrin and Statman: investors realize gains too soon and ride losses. Prospect theory plus a purchase-price reference is the usual story. Tax-aware and mean-reversion stories compete. The empirical pattern is stubborn.
Why it matters
It creates flow: supply of winners, shortage of loser supply. It also wrecks P&L if losers are losers for a reason.
Case
A retail account with many small green closes and a few large red opens. The blotter looks busy and the NAV does not.
How to read it
Force a time-or-thesis stop that does not know the entry. If the thesis is dead, the purchase price is archaeology.
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