# The Disposition Effect: Why Investors Sell Winners Too Soon and Hold Losers Too Long

Cite as: Gorak, R. (2026). The Disposition Effect: Why Investors Sell Winners Too Soon and Hold Losers Too Long. Tradicted. https://www.tradicted.com/research/odean-disposition-1998/
Paper: Terrance Odean — *Are Investors Reluctant to Realize Their Losses?*
Published in: Journal of Finance (1998)
Original: https://faculty.haas.berkeley.edu/odean/papers%20current%20versions/AreInvestorsReluctant.pdf

Key finding: Investors realized gains at a 14.8% rate versus 9.8% for losses across 10,000 U.S. brokerage accounts from 1987 to 1993, making a winning stock more than 50% more likely to be sold on any given day than a losing stock.

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The disposition effect describes investors' tendency to sell winning stocks too early while holding losing stocks too long. In *Are Investors Reluctant to Realize Their Losses?*, Odean (1998) analyzed 10,000 discount brokerage accounts from 1987 to 1993. He found investors realized gains at a 14.8% rate versus 9.8% for losses—a ratio of more than 1.5 to 1.

## What the Study Found

The proportion of gains realized (PGR) was 14.8% for the full 1987–1993 period. The proportion of losses realized (PLR) was 9.8%, a difference significant at t > 35. From January through November, the gap was even wider: PGR 15.2% versus PLR 9.4% (t = 38). In December, the pattern reversed—PLR rose to 12.8% and PGR fell to 10.8% (t = 4.3). Sold winners subsequently outperformed retained paper losses by 3.4 percentage points over the following year (p = 0.001).

## Methodology

The dataset consists of trading records for 10,000 randomly selected accounts at a nationwide U.S. discount brokerage. The sample spans January 1987 through December 1993 and includes 97,483 transactions from 6,380 accounts with CRSP-matched stocks. PGR and PLR count realized and unrealized gains and losses on every sale day in a multi-stock portfolio. Controls include partial-sale exclusions to filter rebalancing, no-repurchase exclusions to filter diversification trades, and price and return partitions to isolate transaction-cost effects.

## Key Statistics

| Metric | Finding | Context |
|---|---|---|
| PGR (Proportion of Gains Realized) | 14.8% | Full year, 1987–1993, all accounts |
| PLR (Proportion of Losses Realized) | 9.8% | Full year, 1987–1993, all accounts; t > 35 |
| PGR/PLR ratio | ~1.5× | Full year; a winner is 50% more likely to be sold than a loser |
| PGR/PLR ratio in January | 2.1× | Highest monthly ratio; declines to 0.85× by December |
| PGR/PLR ratio in December | 0.85× | Below 1.0; tax-loss selling reverses the bias |
| PLR – PGR in December | +2.0 pp | t = 4.3; only month PLR exceeds PGR |
| 1-year excess return: sold winners vs. paper losses | +3.4 pp | p = 0.001; winners sold outperform losers held |
| 2-year excess return: sold winners vs. paper losses | +3.58 pp | p = 0.014 |
| PLPA (Proportion of Losses Purchased Again) | 13.5% | vs. PGPA 9.4% for winners; t = 19 |
| Average account PGR (account-level test) | 0.57 | 1,893 accounts equally weighted; mean PGR – PLR = 0.21, t = 19 |
| Average account PLR (account-level test) | 0.36 | 1,893 accounts equally weighted |
| Formula: PGR | Realized Gains ÷ (Realized Gains + Paper Gains) | Equation (1); measures gain realization rate |
| Formula: PLR | Realized Losses ÷ (Realized Losses + Paper Losses) | Equation (2); measures loss realization rate |

## Why This Matters

The disposition effect imposes a direct cost on taxable investors: selling winners rather than losers generates capital gains tax liability that could be deferred. At the aggregate level, the effect may stabilize prices near historical purchase levels by reducing the supply of sellers below investors' reference points. Selling the loser instead of the winner could raise an investor's annual return by approximately 4.4%. The bias holds across frequent and infrequent traders, the full sample period, and multiple price and return partitions. Reluctance to realize a loss shows up as holding time. Logging planned and actual exits in a [trading journal](/trading-journal/) surfaces the asymmetry in your own account.

## FAQ

### What is the disposition effect?

14.8% versus 9.8%—the gain and loss realization rates Odean (1998) found across 10,000 discount brokerage accounts from 1987 to 1993. A winning stock was more than 50% more likely to be sold than a losing one on any given day. The disposition effect names this pattern: investors sell winning positions too early and hold losing positions too long.

### How does December affect the disposition effect?

12.8% versus 10.8%—in December, the loss realization rate exceeds the gain rate, a reversal significant at t = 4.3. From January through November, PGR was 15.2% and PLR 9.4%, with the gain-over-loss pattern holding in every individual month. In December the PGR/PLR ratio falls to 0.85, the only month it drops below 1.0.

### Do retained losers eventually outperform the winners that were sold?

3.4 percentage points: sold winners outperformed retained paper losses by that margin over the following year (p = 0.001). Over two years, the gap was 3.58 percentage points (p = 0.014). Retained paper losses returned −1.06 percentage points in excess of the CRSP value-weighted index over the following year.

### Is the disposition effect explained by rebalancing or transaction costs?

23.3% versus 15.5% (t = 32)—PGR and PLR when partial sales are excluded to filter rebalancing-motivated trades. Investors repurchased losers at a 13.5% rate versus 9.4% for winners (t = 19), inconsistent with a transaction-cost explanation. Partitioned by price range and return magnitude, winners were realized at higher rates in 14 of 15 comparisons, with 13 statistically significant.

## Source

Odean, T. (1998). Are Investors Reluctant to Realize Their Losses? *Journal of Finance*, 53(5), 1775–1798.

[Read the full paper →](https://faculty.haas.berkeley.edu/odean/papers%20current%20versions/AreInvestorsReluctant.pdf)