Do Investors Sell Winners Early and Hold Losing Stocks Too Long
Investors sell winners early and hold losing stocks too long due to bias, reducing returns and weakening portfolio decisions in volatile markets.
Hadar.Goldberg
Hadar Goldberg is a talented financial journalist with a strong passion for analyzing the stock market. She has a deep understanding of financial markets and is skilled at conducting research and analysis to uncover valuable insights for her readers. Hadar is known for her ability to explain complex financial concepts in a clear and concise manner.
Apr 25 2026
Why do investors sell winning stocks without hesitation but cling tightly to stocks whose value has declined? Recent studies, including new data from the crypto market, reveal your most expensive psychological mistake and how a simple rule of thumb can save your returns
In every private investment portfolio there is at least one burden: a losing stock that its owner clings to like an old worn-out shirt, refusing to sell. "It’s just a temporary correction" you tell yourself, "it’s already down 30%, there is no point in realizing the loss now". This hope is exactly what behavioral economists call the "disposition effect" the human tendency to sell winning stocks too early and hold losing ones for too long.
A groundbreaking study conducted at the University of California has already shown that this behavior is not rational: it does not stem from tax considerations or portfolio balancing, but from the psychological difficulty of admitting a mistake.
The economic impact of this effect is dramatic. Instead of letting profits run and cutting losses, many investors do exactly the opposite: they interrupt the trend of stocks that are likely to continue rising and cling to stocks that continue to fall. Studies show that especially during periods of extreme volatility, when discipline is critical for survival, this bias becomes stronger. What began in the traditional stock market has in recent years spread to the world of crypto, proving that this is not a feature of a specific market, but a basic emotional survival mechanism that simply does not work in our favor in capital markets.
Realizing Losses Means We Made a Bad Choice
The foundational research in this field was published in 1998 by a researcher named Terrance Odean, who examined this effect by analyzing trading records of 10,000 accounts at a large American brokerage firm. He reached a clear conclusion: investors showed a strong preference for realizing gains over losses. This behavior was not driven by a desire to rebalance the portfolio or avoid high transaction costs of low-priced stocks.
Subsequent portfolio performance did not justify it either. For taxable investments, this is suboptimal behavior that leads to lower after-tax returns. The practical implication is that investors sold stocks that went on to rise and held onto stocks that continued to fall.
What Drives This Behavior?
One explanation is simple psychology: selling a stock at a loss hurts. Realizing a loss means admitting we made a bad decision, and people prefer to keep the possibility theoretical and hope for a correction.
An interesting study by Gönter and Lordan published in 2023 offered another angle: in certain situations, the disposition effect can actually be rational, and experimental evidence from professional traders supports this. That is, not everyone who holds a losing stock is wrong but most retail traders who do so are acting for psychological rather than rational reasons.
In Volatile Periods The Effect Intensifies
The most interesting recent research examined this effect in the crypto market. A study by Shetman and Sleshafer published in 2023 in a digital economics journal examined the behavior of Bitcoin investors. The study identified clear evidence of the disposition effect among Bitcoin investors, with varying intensity over time. During the boom and bust cycle of Bitcoin in 2017, the disposition effect became more pronounced, indicating that market conditions influence the strength of the bias. In other words, precisely during periods of extreme volatility, when discipline is essential, investors cling to losing positions more than at any other time.
A review study published in 2023 examined investor behavior in crypto and found similar patterns across the broader market. The review highlighted the disposition effect, in which investors held onto losing assets while quickly selling profitable ones, indicating a strong emotional component in trading decisions.
The key insight from crypto research is that the effect operates in exactly the same way in a new and young market that is supposedly disconnected from the history of traditional stock markets. This suggests it is a fundamental psychological mechanism, not a feature of any specific market.
How Can you Fight the Effect and Let Go?
A study published in 2025 examined ways to combat this effect. After establishing that the tendency to sell winning stocks too early and avoid realizing losses cannot be explained by rational factors such as tax savings, portfolio balancing, private information, or transaction costs, researchers tested different informational interventions. They found that direct education about the bias, combined with changes in how information is presented, can reduce it over time.
So What Can Be Done to Overcome the Bias?
The most effective method is mechanical. Set a predefined rule, for example: “If a stock drops 20 percent from the purchase price, I sell.” This rule removes the need for emotional decision-making in real time.
Another method is to check your portfolio less often the less you look, the fewer emotional decisions you make.
A third, less common approach is to imagine that you do not currently own the stock. Ask yourself: “If I had cash today, would I buy this stock?” If the answer is no, it is time to sell.
The conclusion from 25 years of research is simple and consistent: investors fail not because they made the wrong initial choice, but because they cannot part with bad investments. Those who can shift their response to losses from emotional to practical will likely outperform more than 90 percent of retail traders.
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Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.
