Disposition effect is the tendency of individual investors to ________.
A) trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals
B) buy stocks that have been in the news, advertised more, have very high trading volume, or recently had extreme (high or low) returns
C) put too much weight on their own experience rather than considering historical evidence
D) hold on to stocks that have lost value and sell stocks that have risen in value since the time of purchase

Question

Quizplus · Accepted Answer

The disposition effect refers to the tendency of investors to hold on to losing investments (stocks that have lost value) and to sell winning investments (stocks that have risen in value) too quickly. This behavior is driven by the desire to avoid the emotional pain of taking a loss and to experience the emotional pleasure of realizing a gain. Therefore, option D – holding on to stocks that have lost value and selling stocks that have risen in value since the time of purchase – best describes the disposition effect. Options A, B and C describe other types of biased behavior exhibited by individual investors, but they do not specifically reference the disposition effect.

Disposition Effect Is the Tendency of Individual Investors to ________