Disposition effect on stock prices.

• Position: YOUR LIFE - Brief article

Investor psychology plays a big role in why stock prices show strong momentum--the tendency for prices to continue in the same direction--either rising or falling, suggests a study by Ohio State University, Columbus. "Investors tend to hold on to their losing stocks too long and sell their winners too quickly. This triggers momentum," notes assistant professor of finance Bing Han, explaining what is known as the "disposition effect."

The stock price may go down because of some bad news about the company, but many investors do not want to sell at a loss, so they hold on, hoping the price will rise later. If too many people do that, the stock price does not accurately reflect the bad news. This prompts some investors, noting that the stock is overvalued, to "short sell," betting that prices will fall. This cycle continues to push prices of the stock down, creating a momentum effect.

A similar situation occurs when a stock is rising because of good news for a company. Many investors may decide to sell the stock quickly to capture the gains before prices fall. Yet...