In Brief

Investors across personality types and demographics have a tendency to sell gaining stocks too early and hold on to losing stocks too long, according to research presented at APA's 2005 Annual Convention by Bernardo J. Carducci, PhD, a psychology professor at Indiana University Southeast. Moreover, the effect is most pronounced in more educated people.

Investors' emotions are behind their decision-making, Carducci explained.

"People want a sense of pride, so they sell a winning stock because it makes them feel good," he said. "And they avoid [selling] a losing stock because of feelings of regret--they feel bad about their decisions. So they hold onto that loss a little bit longer."

But while there's something of a consensus that this tendency--which the literature calls "the dispositional effect"--exists, little research has examined the impact that personal characteristics, such as gender, risk tolerance and education level, have on the effect, noted Carducci.

Carducci and his colleagues aimed to fill that gap.

In their study, currently under review at the Journal of Business and Psychology, 181 graduate and undergraduate students simulated managing two assets, which were initially worth $100 a share. In both conditions, one stock rose 15 percent and one stock fell 15 percent. In the first condition, the market steadily declined. In the second condition, the market randomly declined. Following the simulation, the participants completed a risk tolerance and demographic questionnaire.

The researchers found that investors held on to a losing asset significantly longer than a gaining asset, and when gainers were sold, they were generally sold on price upticks.

Aside from the dispositional effect being most pronounced in participants with a higher level of education, the researchers found no other significant predictors among demographics or personality types.

Carducci suggested future studies could test the effects with different participant pools, such as older adults, day traders and members in trading groups compared with individual traders.