Which effect describes individuals tending to sell winning investments prematurely?

The Disposition Effect refers to the tendency of investors to sell assets that have increased in value (their winning investments) too early, while holding onto assets that have decreased in value (losing investments) for too long. This behavior is largely driven by emotional biases rather than rational decision-making.

Investors often feel a psychological need to realize gains as a way to affirm their investment decisions; selling winning investments creates a sense of success and validation. Conversely, the reluctance to sell losing investments stems from the desire to avoid the pain of acknowledging a loss. This asymmetric treatment of gains and losses leads to suboptimal investment strategies, as investors may miss out on potential future gains from winning investments by selling too early or fail to cut losses from losing investments.

Understanding the Disposition Effect is essential for technicians, as it can impact market dynamics and price movements, influencing technical analysis strategies.