Question

Investors tend to sell assets whose prices have increased and keep assets whose prices have decreased. This phenomenon is known as the:

• A. Over-confidence bias.
• B. Disposition effect.
• C. Conservatism bias.
• D. Momentum effect.

Answer 1

This phenomenon (Investors tend to sell assets whose prices have increased and keep assets whose prices have decreased) is known as the:

B. Disposition Effect

Disposition effect creates a problem for the investors. Investors whose let's say shares are falling for a long time keep holding them for even longer periods with the hope that eventually markets will be rise. Whereas an exit strategy at this point could have minimised the loss.

In the contrary case, when the stocks are rising, investors tend to exit at a point where there is a slight downside movement in the stocks (or any assets). Whereas holding them for a longer period could have earned more profits.