Disposition effect

Disposition effect – The disposition effect is a behavioral bias where traders sell winning positions too early but hold losing positions too long, often hoping to break even. It stems from loss aversion: investors realize gains quickly but refuse to realize losses. In robot terminology, a poorly designed system might emulate this by trailing winners with a tight TrailingDrawdown yet ignoring stop-loss on losers. Disposition effect is explicitly linked to loss aversion: investors “sell their winners and hang onto their losers” in the hope of returning to the entry price. This distorts performance by letting losses run, a common pitfall in both human and algorithmic trading.

⬅ Robots Glossary