So I gave my students the following thought experiment:
Say you owned a portfolio of stocks. Over time, some of those stocks have gained value since you bought them and others have lost value (let’s call them winners and losers, respectively). When deciding which stocks to sell and which to hold, should you:
- Sell the losers and hold the winners?
- Sell the winners and hold the losers?
- Something else?
What is the rational thing to do?
This is what they did:
My intended point was to introduce the concept of the disposition effect- the tendency to be more willing to sell stocks that have increased in value than stocks that have decreased in value due to loss aversion- but I guess it’s only fair to go back and have a refresher on efficient markets (or the lack thereof) first. Stay tuned.