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Cited by 3,553Financial Markets and Investment StrategiesDecision-Making and Behavioral EconomicsFinancial Literacy, Pension, Retirement Analysis

The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence

SHEFRIN, HERSH, STATMAN, MEIR·1985·The Journal of Finance
DOI 10.1111/j.1540-6261.1985.tb05002.x
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Abstract

One of the most significant and unique features in Kahneman and Tversky's approach to choice under uncertainty is aversion to loss realization. This paper is concerned with two aspects of this feature. First, we place this behavior pattern into a wider theoretical framework concerning a general disposition to sell winners too early and hold losers too long. This framework includes other elements, namely mental accounting, regret aversion, self‐control, and tax considerations. Second, we discuss evidence which suggests that tax considerations alone cannot explain the observed patterns of loss and gain realization, and that the patterns are consistent with a combined effect of tax considerations and the three other elements of our framework. We also show that the concentration of loss realizations in December is not consistent with fully rational behavior, but is consistent with our theory.

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Crossref · 10.1111/j.1540-6261.1985.tb05002.x

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2 of 2 references verified0 citation errors · 0 not checkable

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  • The disposition effect is the empirical observation that investors are more likely to sell an asset trading at a gain than to sell an asset trading at a loss.

    “We begin by focusing on the disposition effect, which is the empirical observation that investors are more likely to sell an asset trading at a gain than to sell an asset trading at a loss (Shefrin and Statman, 1985).”

    From Striking Out: Biases and Losses of Retail Option Traders (2024) · cites this paper as Shefrin and Statman, 1985

  • The finding that option features influence the disposition effect presents a challenge for disposition effect theories based on prospect theory, speculative belief updating, and the law of small numbers, as well as for rational theories of the disposition effect.

    “our finding that option features influence the disposition effect presents a challenge for disposition effect theories based on prospect theory (Shefrin and Statman, 1985), speculative belief updating (Pitkäjärvi, 2022), and the law of small numbers (Jin and Peng, 2023), as well as for rational theories of the disposition effect (Dorn and Strobl, 2023; Dai, Jiang, Liu, and Xu, 2023).”

    From Striking Out: Biases and Losses of Retail Option Traders (2024) · cites this paper as Shefrin and Statman, 1985

  • If investors have a disposition to sell winning investments and ride losing investments, positive abnormal returns on short-term round-trip trades would be expected.

    “If investors have a disposition to sell winning investments and ride losing investments (as proposed by Shefrin and Statman (1985)), we would expect to observe positive abnormal returns on shortterm round-trip trades.”

    From Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors (2000) · cites this paper as Shefrin and Statman (1985)

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Authors
SHEFRIN, H., & STATMAN, M.
Affiliations
Santa Clara University (US)
ORCID
SHEFRIN, HERSH
Venue
The Journal of Finance
Publisher
Wiley
Published
1985-07
Volume
40
Issue
3
Pages
777-790
ISSN
  • 0022-1082 (ISSN-L)
  • 1540-6261
DOI
10.1111/j.1540-6261.1985.tb05002.x
OpenAlex
W2157323155
Cited by
3,553
References
2
Citations by year
2026: 148 · 2025: 167 · 2024: 172 · 2023: 157 · 2022: 139 · 2021: 190 · 2020: 165 · 2019: 188 · 2018: 190 · 2017: 156 · 2016: 153 · 2015: 163 · 2014: 188 · 2013: 139 · 2012: 163
FWCI
10.19
Type
journal article
Language
en
Open access
closed
Licence
onlinelibrary.wiley.com/termsAndConditions#vor (vor, 9800 d)
Locations
  • The Journal of Finance (publishedVersion)
  • RePEc: Research Papers in Economics (submittedVersion)
Topics
  • Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
  • Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
  • Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
Keywords
disposition effect, loss realization, mental accounting, regret aversion, self-control, tax considerations, behavioral finance, decision making under uncertainty, December effect, investor irrationality

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