What Is the Disposition Effect?
Can one bias throw your whole portfolio off track? Yes. Can you fix it? Also yes.
Welcome to the disposition effect, a common investing blindspot that is costly and researchers have studied it for decades, yet everyday investors (and professionals!) still fall prey to it.
You’ve probably heard the phrase: “Don’t cut the flowers and water the weeds”--that’s the disposition effect. Investors tend to sell their winning stocks too quickly (‘cutting the flowers’) and hang on to their losing stocks for too long (‘watering the weeds’).
The results? Lower returns, more frustration, and a portfolio underperforming its true potential.
How I Learned About the Disposition Effect
When I was a behavioral finance PhD student, I was hired to teach undergrads at the Claremont Colleges. I wanted my students to learn beyond the textbooks and to have “live” lessons, so I decided to put my money where my mouth was.
I borrowed against every student loan I could, opened a brokerage account, and started trading.
It didn’t take long before I was confronted with uncomfortable truths: I wasn’t selling my losers. I told myself, “It’s going to come back! Don’t sell now” even when the evidence said otherwise. I also sold a future massive, famous winner (NVDA), which might be the most commonly known article about me (don’t believe me? Right now search for Amos Nadler NVDA and see what comes up).
The research I was teaching made it painfully clear that my behavior matched exactly what Hersh Shefrin and Meir Statman had identified in their groundbreaking 1985 paper: the disposition effect. Years later, Terry Odean at UC Berkeley confirmed it with hard data from retail brokerage accounts.
The pattern was the same everywhere:
- Investors sold winners too early
- They held onto losers too long
- The stocks they sold kept outperforming
- The stocks they held underperformed
This wasn’t just theory. It was real. It was measurable. And it was destructive.
Why It Matters
At first glance, the disposition effect doesn’t sound catastrophic. But once you see the numbers, it’s hard to unsee them.
This bias shows up across asset classes—stocks, bonds, forex, crypto, real estate—even in corporate mergers and acquisitions. Everyday investors, professionals, even institutions: the same mistake repeats.
It isn’t just an investing quirk; it’s a fundamental human tendency. The drive to avoid regret, the mental accounting of “I’ll sell when I break even,” the temptation of quick profits—these all wire us to behave in ways that feel good but cost us money.
The result? A quiet, invisible but powerful drag on performance.
The Problem With Awareness Alone
Knowing about the disposition effect isn’t enough to prevent it. This is where many investors get stuck.
It’s like medical students who suddenly “see” every disease they’re studying in themselves. In finance, simply reading about the disposition effect doesn’t stop you from doing it. Without tools and feedback, you can’t diagnose whether it’s happening in your own portfolio—or how much it’s costing you.
That gap is exactly why I built Prof of Wall Street with my team.
How Prof of Wall Street Fixes It
Prof of Wall Street is the first and only platform that lets you:
- Pull in your real trading data directly from your brokerage
- See whether you have the disposition effect—not theoretically, but in your actual trades
- Visualize the cost: our system builds a “counterfactual” version of your portfolio, showing how it would have performed if you sold losers sooner and held winners longer
- Get guided workflows designed to reduce the bias, encourage smarter selling, and help you make consistent, rational decisions.
Sometimes the results are subtle. Sometimes they’re shocking. But either way, they’re personalized—no more guessing, no more one-size-fits-all advice.
Overcoming the Disposition Effect
Even if you don’t want to have your trades analyzed, here are three steps every investor can start with:
1. Identify the Pattern: Ask yourself: am I selling just because I’m afraid of losing gains? Or am I holding because I can’t bear to admit defeat?
2. Consider the Costs
- Selling winners too early usually triggers higher short-term capital gains taxes
- Holding losers too long prevents tax-loss harvesting opportunities
- Both quietly erode wealth
3. Reframe the Choice
With each losing position, ask: Would I buy this stock again today with fresh money? If the answer is no, it may be time to let go.
The Future of Investing Is Behavioral
Behavioral finance has given us decades of insight into how humans make mistakes with money. What’s been missing is a way to actually apply those insights—at the level of the individual, in real portfolios.
That’s the innovation behind Prof of Wall Street. We’re making behavioral analytics accessible so investors can finally see their own biases, quantify the impact, and take steps to fix them.
Conclusion
The disposition effect is one of the most common (and costly) mistakes investors make. But now, for the first time, you don’t have to wonder whether it’s lurking in your portfolio.
At Prof of Wall Street, we give you the tools to see it, measure it, and, for the first time, overcome it.
Stop cutting the flowers and watering the weeds. Take control of your portfolio and start building the habits of an optimized investor.
Ready to find out if you have the disposition effect?
Create an account here.
