Macro Analysis /
United Kingdom

GB : Strategy - Petrified in a bear market – until you see an exit sign

    Joachim Klement
    Joachim Klement

    Analyst - Strategy, Accounting, and Sustainability (SAS)

    CGS-CIMB
    26 March 2022
    Published by

    One of the most prominent findings of behavioural finance is the disposition effect. The disposition effect describes the tendency of investors to sell winners too soon and hang on to losers for too long. In essence, nobody likes to admit to themselves that they have made a mistake in their investments so when they suffer a loss, they try to hang on to that investment in the hope of regaining lost ground and sell it at a later point at a lower loss or maybe even a gain. Meanwhile, if investors are sitting on a gain, they are inclined to sell that investment so they can lock in those gains and forever brag to their friends about how good an investor they are. The disposition effect is so strong that it shifts the odds in horse racing, for example, and can lead to strategies that allow “punters” to systematically gain at horse racing over time (but that is a story for another time).