Mike is a stock broker and financial planner. Phil is one of Mike's clients. Phil prefers to meet with Mike just once a year to review his investment portfolio. At their most recent meeting, Phil stated he believes the stock market is going to decline in value over the next six months. Thus, Phil instructed Mike to sell every stock he owns that is currently worth more than what he paid to purchase it. Phil also instructed Mike to retain any stock that would create a capital loss if sold. Phil is displaying the behavior known as:
A) Over-confidence.
B) Arbitrage theory.
C) The disposition effect.
D) The house money effect.
E) A confirmation bias.

Question

Quizplus · Accepted Answer

Phil's behavior of preferring to sell stocks that have gained value while holding onto those that would result in a loss is indicative of the disposition effect. This phenomenon describes the tendency of investors to sell assets that have increased in value, but hold onto assets that have decreased in value.

Mike Is a Stock Broker and Financial Planner