The biggest investor error, Part 10: retain losers, sell winners
In the episodes of our series, we have already written about the property effect and the status quo bias. The two typical investor mistakes can be observed very well in the financial markets in the form of another effect. This is called the disposition effect.
The stating that investors tend to sell positions that have previously made profits, rather than losing positions. There is a tendency for losing shares to stay longer in investors' deposits than for winning stocks. Of course, this has consequences for the performance of the portfolio. It leads to a reduction of the achievable yield, because the winning positions are sold too early and the loser positions too late.
Selling a loser position is often considered a kind of mistake. And this is not consistent with the desire for consistent action. Conversely, the perceived value of further price increases decreases significantly, which leads to profit taking too early.