The disposition effect is an anomaly discovered in behavioral finance. It relates to the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value.[1]
Hersh Shefrin and Meir Statman identified and named the effect in their 1985 paper, which found that people dislike losing significantly more than they enjoy winning. The disposition effect has been described as one of the foremost vigorous actualities around individual investors because investors will hold stocks that have lost value yet sell stocks that have gained value."[2]
In 1979, Daniel Kahneman and Amos Tversky traced the cause of the disposition effect to the so-called "prospect theory".[3] The prospect theory proposes that when an individual is presented with two equal choices, one having possible gains and the other with possible losses, the individual is more likely to opt for the former choice even though both would yield the same economic result.
The disposition effect can be minimized by a mental approach called "hedonic framing".