Transcript of the podcast:
After you listen
- To hear more about the impact of loss aversion in high-stakes situations, listen to the "Losses Loom Large" episode of the Choiceology podcast.
- And for more insights into trading strategies—plus market news and commentary from Schwab experts—check out Schwab Live Daily.
Investors often spend a lot of time and energy trying to decide which investments are the best to buy. But what about when it is time to sell? In this episode of Financial Decoder, Mark shares what the research tells us about the psychology of the sell decision. Choosing to keep or to sell a stock or other investment can be complicated because of something called the disposition effect. Joining Mark in the discussion is Omar Aguilar, chief investment officer for equities at Charles Schwab Investment Management, who talks about the way professional money managers work to mitigate behavioral and cognitive biases.
- One study, looking at real brokerage accounts of individual investors, found that stocks with an unrealized gain are 50% more likely to be sold than stocks with an unrealized loss. For more information on this study, see "Are Investors Reluctant to Realize Their Losses?" from The Journal of Finance.
- Another study found that when stocks are inherited, the disposition effect is half as large as it is when stocks are purchased by the investor. You can read more about this study in the Journal of Behavioral Decision Making.
- Mark also discusses the use of stop-loss orders to reduce the disposition effect. This was studied in detail by researchers in the European Journal of Finance.
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