Are Investors Reluctant to Realize Their Losses?

TLDR

The study tests the disposition effect by examining trading records of 10,000 accounts at a large discount brokerage. The authors analyze these records to assess how investors hold losing positions and sell winning ones. Investors disproportionately realize gains rather than losses, a behavior not driven by rebalancing, trading costs, or future performance, which is suboptimal for taxable accounts and peaks in December.

Abstract

ABSTRACT I test the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon, by analyzing trading records for 10,000 accounts at a large discount brokerage house. These investors demonstrate a strong preference for realizing winners rather than losers. Their behavior does not appear to be motivated by a desire to rebalance portfolios, or to avoid the higher trading costs of low priced stocks. Nor is it justified by subsequent portfolio performance. For taxable investments, it is suboptimal and leads to lower after‐tax returns. Tax‐motivated selling is most evident in December.