◐ Behavioral
◆ The PatternThe tendency to sell winning positions too early (pride) and hold losing positions too long (hope).
The disposition effect (Shefrin & Statman, 1985) — selling winners too early and holding losers too long.
Mechanism:
• Winner: feels good → sell to "lock in" pleasure → miss further gains
• Loser: feels painful → hold to avoid realizing pain → loss deepens
Result: The exact opposite of the rational strategy — let winners run, cut losers short.
• Winner: feels good → sell to "lock in" pleasure → miss further gains
• Loser: feels painful → hold to avoid realizing pain → loss deepens
Result: The exact opposite of the rational strategy — let winners run, cut losers short.
It's also tax-inefficient: you pay capital gains tax on winners early but can't deduct unrealized losses.
Pattern bridge: Selling winners too early, holding losers too long. In ML, learning rate scheduling fights the same instinct: slow down on gains, keep going through losses.