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

TLDR

Kahneman and Tversky’s theory identifies aversion to loss realization as a key feature of choice under uncertainty. The study examines how this aversion manifests as a tendency to sell winners early and hold losers long, and evaluates evidence that tax motives alone cannot explain these patterns. The authors construct a framework integrating mental accounting, regret aversion, self‑control, and tax considerations to explain the disposition to sell winners early and hold losers long. They find that loss realizations cluster in December, contradicting rational models but supporting the proposed theory.

Abstract

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.