Disposition effect
The disposition effect is the tendency to close winning positions too early and hold losing positions too long. Described by Hersh Shefrin and Meir Statman in 1985 and documented in brokerage records by Terrance Odean in 1998, it shows up in trading records as a low payoff ratio and losing trades that last longer than winners.
Senzoukria · Glossary · Updated September 2026
Origin of the term
Hersh Shefrin and Meir Statman named the effect in a 1985 paper on the disposition to sell winners too early and ride losers too long. Terrance Odean's 1998 study of individual brokerage accounts found that investors realized gains more readily than losses. The usual explanation draws on prospect theory, from Daniel Kahneman and Amos Tversky: people treat gains and losses relative to a reference point, often the entry price, and dislike realizing a loss more than they value realizing an equal gain.
How it appears in an intraday record
- Average holding time of losing trades much longer than that of winners.
- Average loss larger than the planned stop, because stops are moved or exits delayed.
- Maximum favorable excursion of winners much larger than their realized gain: profit was available and not kept.
- A payoff ratio below what the planned reward-to-risk implies.
Measuring it
Split trades into winners and losers and compare their average holding times and their average result against the planned stop and target. Then compare each trade's realized result with its MAE and MFE: losers whose MAE is far beyond the planned stop, and winners whose MFE is far above the exit, are the two faces of the effect. The fix is procedural, placing the stop and target as resting orders at entry and changing them only by a rule written in advance.
In Senzoukria
The automatic backtest records MAE and MFE for every trade, measured on the price path including the bar that closed the trade, and the Performance panel draws a P&L by holding time chart while the run's trades are in memory. For manual trading, the journal stores entry and exit times, prices and P&L, and its CSV export carries them for the winners-versus-losers comparison. On live and simulated positions, protective orders placed at entry and a break-even move that is refused unless the market has passed the entry keep exits rule-based rather than improvised.
Related
In the same section
- DOM
- Direct market access
- DOM profile
- Direct connection
- DOM software
- Diagonal imbalance
- Double distribution
- Developing POC
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Frequently asked questions
- Is taking profits quickly always the disposition effect?
- No. A strategy designed with small targets can take profits quickly by rule. The effect is present when exits deviate from the plan in a systematic direction: winners cut before target and losers held past the stop.
- How can I reduce the disposition effect?
- Decide exits before entry and place them as orders, so that closing a position is the default and keeping it requires a rule. Reviewing MAE and MFE per trade shows whether the pattern is present and whether changes reduce it.