The stock has no idea what you paid for it. Most investors still trade as if it does. This week the biases from Week 5 stop being about "investors" and start being about you.
Learning objectives. After this week you can (1) explain the disposition effect and measure it in your own trades; (2) spot overtrading, recency and anchoring in your own record; and (3) write one rule that counters a bias you measured.
Remember this: every day you hold a stock, you are choosing to buy it again at today's price.
1) Your data
Your arena page keeps the evidence. Recent trades lists your latest 25 fills: buy or sell, symbol, shares, price and total. Holdings shows each position's Avg cost and Gain/Loss. The Account panel's Realized P&L is the profit or loss you locked in by selling, booked as (sale price − Avg cost) × shares; Unrealized P&L is the gain or loss on what you still hold.
2) The disposition effect
The disposition effect is loss aversion in action: selling winners too early and riding losers too long. Terrance Odean found it in thousands of real brokerage accounts, and the losers people kept went on to do worse than the winners they sold. Sort your positions into four groups: sold at a gain (realized gains), still held at a gain (paper gains), and the same two for losses.
PGR = Realized Gains ÷ (Realized Gains + Paper Gains) · PLR = Realized Losses ÷ (Realized Losses + Paper Losses) · Disposition Ratio = PGR ÷ PLR
PGR is the share of your winners you sold; PLR, the share of your losers. Ten positions: of 5 that showed a gain you sold 4; of 5 that showed a loss you sold 1.
| Metric | Computation | Result |
|---|---|---|
| PGR | 4 ÷ (4 + 1) | 0.80 |
| PLR | 1 ÷ (1 + 4) | 0.20 |
| Disposition ratio | 0.80 ÷ 0.20 | 4.0 |
A ratio near 1 treats winners and losers alike. This one is four times as willing to sell a winner.
3) Overtrading, recency and anchoring
Turnover = Total Buy Dollars ÷ Average Portfolio Value
Overconfidence shows up as volume. $180,000 of buys on an account averaging $100,000 is a turnover of 1.8×. Odean found the most active traders earned several points a year less than the least active. Arena trades are free; real ones pay spreads and often taxes. Recency is buying what just went up. Anchoring is holding a loser "until it gets back to what I paid," a number the market ignores.
Quick self-check
(a) You sold 3 of 6 winners and 2 of 4 losers. PGR, PLR and ratio? (b) $150,000 of buys on an account averaging $100,000. Turnover? (Answers: 0.5, 0.5, 1.0, no disposition effect; 1.5×.)
Common mistakes
- Small-sample verdicts. Eight trades prove nothing; hold the conclusion loosely.
- Calling rebalancing a bias. Trimming a winner back to target is not the disposition effect.
- Auditing to feel bad. The point is one rule you will actually follow.
This week in the arena
Go through your Recent trades and Holdings and put every position you have held into the four groups. Compute your PGR, PLR and disposition ratio. Then write one rule of your own, specific enough that you could check later whether you kept it, aimed at whichever number surprised you most.