Disposition Effect

The disposition effect refers to people’s reluctance to realize losses and to give up loosing business projects and investments although it would be in their best interest to turn to more profitable ventures. It is a kind of sunk cost fallacy. Evolutionary biologists postulate that an explanation for such behavior lies in the fact that organisms that place a higher weight on forgoing threats and losses relative to maximizing opportunities are more likely to pass on their genes. That is the prospect of losses seems to have a much more powerful influence on behavior than the promise of gains. Whenever possible, we try to avoid losses of any kind leading to an irrational bias in our behavior.

next