Investors seek to avoid actions that will cause regret and seek actions that will cause pride. According to behavioral finance theory, this action manifests itself through the disposition effect – a greater likelihood that investors will sell winners and keep losers. This can result in higher taxes (capital gains) and poorer returns.
Odean found that winning stocks that were sold generally beat the market by an average 2.35% over the following year, while the losing stocks investors held underperformed by an average 1.06%. Thus, investors keeping the losing stocks too long increased their losses, while those selling winners missed out on further gains and increased their tax bill.