Disposition effect
TheoryDefinition
The tendency to sell winning investments too early and hold losing investments too long. A direct consequence of loss aversion + the desire to "be right." Documented in tax-loss-harvesting failures, retail brokerage data, and even professional traders.
The asymmetry of capital gains tax treatment makes the disposition effect doubly costly: holding losers wastes potential tax-loss harvesting, while selling winners early triggers short-term gains taxed at higher rates.
The asymmetry of capital gains tax treatment makes the disposition effect doubly costly: holding losers wastes potential tax-loss harvesting, while selling winners early triggers short-term gains taxed at higher rates.