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Are Investors Reluctant to Realize Their Losses?

Terrance Odean
The Journal of Finance
Vol. 53, No. 5 (Oct., 1998), pp. 1775-1798
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/117424
Page Count: 24
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Are Investors Reluctant to Realize Their Losses?
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Abstract

I test the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon, by analyzing trading records for 10,000 accounts at a large discount brokerage house. These investors demonstrate a strong preference for realizing winners rather than losers. Their behavior does not appear to be motivated by a desire to rebalance portfolios, or to avoid the higher trading costs of low priced stocks. Nor is it justified by subsequent portfolio performance. For taxable investments, it is suboptimal and leads to lower after-tax returns. Tax-motivated selling is most evident in December.

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