Definition
Gains are taken quickly while losses linger because emotions treat outcomes asymmetrically.
Example
A trader exits a profitable bond position quickly to "lock in" gains but continues to defend a credit position that is materially underwater. The decision is shaped more by the emotional impact of realised gains and losses than by objective expected value.
Cognitive Driver
The underlying mechanism is asymmetric emotional weighting. Realising a gain feels rewarding; realising a loss feels painful. The trader resolves the emotional discomfort by harvesting winners prematurely and deferring the realisation of losses, even when doing so harms long-term performance.
Market Expression
Winners are trimmed or closed early. Losers remain on the books with shifting narratives designed to justify holding. Stop-losses are widened. P&L becomes the primary lens for assessing a trade, overshadowing the underlying drivers and thesis integrity.
Trigger Conditions
- Strong emotional attachment to entry price
- Volatile P&L swings
- Environments with high benchmark pressure
- Trades where investors have "ownership pride"
- Situations where recent gains feel fragile or fleeting
Diagnostic Markers
- Winners consistently closed before reaching predefined targets
- Losers held beyond thesis breach points
- Frequent use of "room to recover" language
- Rationales rewritten post-hoc to defend underwater positions
- Position reviews dominated by P&L commentary rather than fundamentals
Cost Profile
- Negative skew as losses compound while gains remain capped
- Lower overall expected return due to premature profit-taking
- Missed opportunity costs from idle capital held in losing trades
- Behavioural drift toward low-quality exposures
- Breakdown of systematic discipline
Differentiation From Adjacent Biases
- Not loss aversion: loss aversion is the pain-avoidance mechanism; the disposition effect is the observable pattern it produces.
- Not anchoring: anchoring centres on initial reference points; disposition centres on the emotional impact of P&L.
- Not confirmation bias: this is not narrative defence but asymmetrical exit behaviour.
Corrective Lens
Make exit criteria independent of P&L. Use prospective checklists that evaluate whether the current forward-looking thesis justifies staying in the trade. Enforce symmetrical rules for trimming winners and cutting losers, ensuring P&L is recorded but not allowed to dictate holding periods.