Disposition effect
Definition · Level 8 · Risk & portfolio
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Habit of selling winners too early and holding losers too long, to lock in gains and avoid realizing losses (named by Shefrin & Statman; documented by Odean).
Example
Sold the +8% stock, still holding the −25% one.
Where Tradecraft teaches it
Level 8 · Risk & portfolio, in the lesson “Trading psychology & biases”: Name the common biases behind blown-up accounts — and the rule that helps counter each one.
Related terms
- AnchoringFixating on an arbitrary reference price — your entry, a prior high — when judging what something is worth now.
- Confirmation biasSeeking and weighting only information that supports your existing position while dismissing evidence against it.
- FOMOFear of missing out: chasing a move that has already happened, without a planned setup or stop.
- Loss aversionTendency to weigh a loss more heavily than an equal gain — about 2× in Kahneman & Tversky’s prospect-theory experiments — which makes traders refuse…
- OverconfidenceOverrating your own skill or information — usually after a winning streak — leading to oversized or overly frequent trades.
- Recency biasOverweighting the most recent trades or market days when judging a strategy or forecasting what comes next.