Explaining a Part of Psychology: The Tendency to Sell Early and Prefer Holding onto Profits

(Excerpt from “Financial Behavior” by Duke University)

The Disposition Effect is a common psychological tendency in investing, characterized by the following investor behaviors:

📌Selling profitable investments early: When an investment yields a profit, investors tend to cash in early, fearing that prices will drop in the future and they will lose their earnings.

📌Holding onto losing investments: Conversely, with losing investments, investors often have a “hold” mentality, hoping that prices will recover and they can break even or make a profit.

This behavior stems from human cognitive errors, including:

🚩Fear of loss: Investors worry more about losing money than making money, leading them to sell off when in profit and hold when at a loss.

🚩Anchoring bias: Investors tend to rely on the original purchase price (entry point) of a stock/coin as a benchmark to evaluate investment performance, rather than its actual value (such as market valuation, fund overview, roadmap, potential, etc.)

🚩Overconfidence: Investors often trust their own market prediction abilities (thinking they can predict the market), leading them to hold onto losing investments in the hope that the market will turn in their favor and they will profit.