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




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    • University of Santa Clara, Leavey School of Business. We would like to acknowledge the helpful remarks made on earlier versions by Peter Bernstein, Fischer Black, Ben Branch, Ivan Brick, Werner De Bondt, Edward Dyl, Avner Kalay, Seymour Smidt, and Richard Thaler. Special thanks go to George Constantinides whose incisive discussion led to major improvements that are reflected in this version of the paper. We retain full responsibility for all errors.


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.