By TMEEX 
losing money
It’s common for investors to wish they had held onto profitable investments longer or sold losing money assets sooner. This struggle often stems from what experts call the “disposition effect.”
“The ‘disposition effect’ theorizes that losses—whether in stocks, real estate, or other domains—impact us emotionally far more than equivalent gains,” explained Matthew Griffin, a UK-based behavioral economist. “It’s linked to an aversion to losses, causing many to make irrational investment decisions.”
Origins of the ‘Disposition Effect’
Identified by psychologists Daniel Kahneman and Amos Tversky in 1979, the disposition effect stems from a behavioral bias called “loss aversion.” It describes how investors prefer avoiding losses over achieving equivalent gains. For instance, investors would rather avoid losing Dh1,000 than earn Dh1,000, even if the outcomes are equally likely.
This aversion drives many investment decisions, as losses are often perceived as personal failures. Research shows the pain of losing money outweighs the joy of earning it, causing investors to act irrationally.
Impact on Investment Decisions
“When stock markets drop, many investors, particularly those nearing retirement, panic and make irrational decisions to avoid further losses,” said Brody Dunn, an investment manager in the UAE. “Others might avoid investing altogether out of fear of losing money.”
Dunn added that these fears stem from not wanting to lose hard-earned money or face financial setbacks. To combat these tendencies, financial planners stress the importance of long-term investment strategies.
Overcoming the ‘Disposition Effect’
New investors can take several steps to mitigate the fear of losses and avoid irrational decisions:
- Avoid Frequent Portfolio Monitoring
“Follow a proven investment plan and limit how often you check your portfolio,” advised Dunn. Market psychologist Paul Andreassen found that investors who frequently check their investments tend to trade more and generate poorer returns. “Watching daily market fluctuations can lead to bad decisions. Limit portfolio reviews to once a month or quarter,” added Griffin. - Set Clear Investment Goals
Creating a written investment plan with defined goals and timeframes helps investors stay disciplined. “Outline your strategy, choose investments carefully, and commit to your plan despite market volatility,” said Dunn. Constantly adjusting strategies can increase the risk of losses.
Key takeaways
Investing is a critical tool for building wealth over time, often for life milestones like retirement or education. However, biases like the disposition effect can lead to poor decisions, such as selling profitable investments too soon or holding onto underperforming ones for too long.
“Be mindful of whether you’re holding onto losing investments in the hope of breaking even,” cautioned Griffin. “This tendency to avoid losses can harm your profits.”
Renowned economist Hersh Shefrin described the disposition effect as a “predisposition towards getting even,” emphasizing the importance of cutting losses and sticking to rational investment plans.