Disposition effect

The disposition effect describes the tendency of investors to realise gains too early and sit out losses for too long.

How it works:

Share rises (+30%): "Sell quickly before the gain disappears!" → you sell with a 30% gain. The share then rises by another 200%.

Share falls (−40%): "It'll surely recover. If I sell now, the loss becomes real." → you hold. The share falls to −80%.

Why does this happen?

• Loss aversion: losses hurt twice as much as gains please
• Sunk cost fallacy: "I've already invested so much, I can't sell now"
• Overconfidence: "I know better than the market"

What the disposition effect costs you:

Studies show: investors subject to the disposition effect achieve on average 3–7% less return per year than the market.

Remedy:

✅ ETF savings plan (no individual shares = no disposition effect)
✅ Fixed rules: "I never sell before 10 years"
✅ Don't check your portfolio every day (what you don't see can't trigger you emotionally)