nvestors will often sell a stock that has gains rather than a stock that is suff

Question

nvestors will often sell a stock that has gains rather than a stock that is suffering losses in their portfolio, despite subsidized tax relief when selling at a loss. What are the logic-defying behavioral implications of such a decision?

            Maintaining winning positions in the portfolio enhances future portfolio growth rate

            Selling a stock at a gain results in dollar cost averaging benefits

            Selling an equity position at any point results in a favorable tax benefit

            Investors hate taking any loss, especially when they can realize a gain

Explanation / Answer

Investors tend to generally sell a stock that has gains rather than a loss making stock since the general human psychology is that we hate taking losses since it somehow imputed as an error in our decision making and we take this as a personal failure on our part. The behavioural scientists propose that even though a rational investor should let their wining stocks continue and cut losses on their loosing positions, but the converse is visible in the real world due to the emotional attachment to our decision to invest and the resultant outcome - the investors will try to hold on their loss making stocks in the hope of atleast exiting at cost price so as to assuage their ego/self worth which is tied to the decision to invest without many time considering the hard logic of possible further losse, loss in time value of money or possible higher profits on their profitable stocks . Hence in this case also, the right answer will the last option : "Investors hate taking any loss, especially when they can realize a gain"

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