A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

Pride and Regret
Behavioralists also stress the importance of the emotions
of pride and regret in influencing investor behavior. Investors
find it very difficult to admit, even to themselves, that they
have made a bad stock-market decision. Feelings of regret
may be amplified if such an admission had to be made to
friends or a spouse. On the other hand, investors are usually

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quite proud to tell the world about their successful
investments that produced large gains.
Many investors may feel that if they hold on to a losing
position, it will eventually recover and feelings of regret will
be avoided. These emotions of pride and regret may be behind
the tendency of investors to hold on to their losing positions
and to sell their winners. The Barber and Odean study of the
trading records of 10,000 clients of a large discount brokerage
firm found a pronounced “disposition effect.” There was a
clear disposition among investors to sell their winning stocks
and to hold on to their losing investments. Selling a stock that
has risen enables investors to realize profits and build their
self-esteem. If they sold their losing stocks, they would
realize the painful effects of regret and loss.
This reluctance to take losses is clearly non-optimal
according to rational investment theory and stupid in
commonsense terms. Selling stocks with gains (outside tax-
advantaged retirement accounts) involves paying capital gains
taxes. Selling stock on which losses have been realized
involves reducing taxes on other realized gains or a tax
deduction, up to certain limits. Even if the investor believed
that his losing stock would recover in the future, it would pay

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to sell the stock and purchase a stock in the same industry
with similar prospects and risk characteristics. A similar
reluctance to take losses appears to be evident in the
residential housing market. When house prices are rising, the
volume of sales rises and houses tend to sell quickly at asking
prices or higher. During periods of falling prices, however,
sales volumes decline and individuals let their homes sit on
the market for long periods of time with asking prices well
above market prices. Extreme loss aversion helps explain
sellers’ reluctance to sell their properties at a loss.