Disposition Effect in Indian Markets: The Data and How to Beat It

What the Disposition Effect Actually Is

The disposition effect is a behavioural bias where traders are quick to realise profits and slow to realise losses. You sell the stock that is up 8 percent to feel the satisfaction of a win, and you keep the stock that is down 20 percent because selling would force you to admit the loss is real. The term was coined by Hersh Shefrin and Meir Statman in 1985, building on the Prospect Theory of Daniel Kahneman and Amos Tversky, who showed that the pain of a loss feels about twice as strong as the pleasure of an equal sized gain.

What makes this bias different from a normal opinion about a stock is that it is measurable and it is consistent. Researchers do not ask traders how they feel. They count actual trades. Every day you hold a position, the position is either a paper gain or a paper loss. When you sell, that sale either realises a gain or realises a loss. By counting these four buckets across thousands of accounts, behavioural economists turned a vague idea about emotion into a hard statistic that shows up in almost every market studied, including India.

The bias is not the same as being wrong about a stock. You can be right about a company and still be hurt by the disposition effect, because the bias controls your timing of selling, not your stock picking. A trader who books a 10 percent winner that then doubles, and holds a 10 percent loser that falls 70 percent, made two timing mistakes even if both initial buys were reasonable.

How the Bias Is Measured: PGR and PLR

The standard way to measure the disposition effect comes from Terrance Odean's 1998 paper, which examined 10,000 accounts at a large discount brokerage. He defined two ratios. The Proportion of Gains Realised (PGR) is the number of winning positions you actually sold divided by all the winning positions you could have sold. The Proportion of Losses Realised (PLR) is the number of losing positions you sold divided by all the losing positions you could have sold. If you have no bias, PGR and PLR are roughly equal.

Odean found PGR of about 0.148 and PLR of about 0.098. In plain terms, on any given day a trader was around 1.5 times more likely to sell a stock standing at a gain than a stock standing at a loss. Crucially, the winners they sold went on to outperform the losers they kept over the following year, so the behaviour cost them money directly. This single result is the reason the disposition effect is treated as a real, costly bias and not just a saying.

The Indian Evidence: Numbers That Quantify the Bias

The disposition effect is not a Western quirk. It is documented in Indian markets too, and the Indian regulator's own data shows how expensive the related habit of not cutting losses has become. SEBI's study released in January 2023, covering individual traders in the equity F&O segment, found that 89 percent of individual traders lost money in FY22, with an average net loss of around Rs 1.1 lakh per loss making trader. Active traders who placed more than 500 orders lost even more on average. Refusing to close a losing options position because you are waiting for it to come back is the disposition effect operating at scale.

Academic work on Indian equities mirrors Odean's structure. Studies using National Stock Exchange data, including the well known work by Sankar De, Naveen Gondhi and others on Indian individual investors, find that retail traders in India sell winners at a clearly higher rate than they sell losers, and that this behaviour predicts lower returns. The size of the gap varies by study, but the direction is always the same, a positive PGR minus PLR spread, the identical pattern Odean reported in the United States.

These are illustrative figures drawn from regulator and academic reports, and the exact numbers are revised over time, so always confirm the latest SEBI release before quoting them. The point is not the decimal place. The point is that across a US brokerage in the 1990s and across millions of Indian F&O accounts today, the same measurable pattern appears: gains get cut early, losses get held.

A Fully Worked Indian Example: Nifty Weekly Options

Numbers make the bias concrete, so here is a worked example using a Nifty weekly call option. All values are illustrative and are not a forecast. Suppose Nifty spot is at 24,000 on a Monday. You buy 1 lot of the 24,200 weekly call expiring that Tuesday. The Nifty lot size is 65. The premium is Rs 90 per unit, so your cost is 90 multiplied by 75, which is Rs 6,750, plus charges.

Two things can happen and the disposition effect changes how you treat each. Case one, the winner. By Tuesday Nifty rallies and your call is worth Rs 150. Your position is now worth 150 multiplied by 75, which is Rs 11,250, an unrealised gain of Rs 4,500 before costs. The disposition effect screams at you to book it now and feel the win, even though the trend is strong and the option could run further into expiry. Many traders sell here and lock a modest profit.

Case two, the loser. Instead Nifty drifts down and by Wednesday your call is worth Rs 40. Your position is worth 40 multiplied by 75, which is Rs 3,000, an unrealised loss of Rs 3,750. The disposition effect now tells you to hold and wait for a bounce. But this is a weekly option with one day to expiry, and theta, the daily time decay, accelerates sharply in the final sessions. If Nifty does not move up fast, the option can expire worthless on Tuesday, turning a Rs 3,750 paper loss into a full Rs 6,750 loss. Holding the loser here is not patience, it is the disposition effect handing your premium to time decay.

• Winner cut early at Rs 150: gross gain about Rs 4,500, but you may have left a larger move on the table by selling on the emotion of a win.
• Loser held to expiry at Rs 0: loss expands from Rs 3,750 on Wednesday to the full Rs 6,750 premium, plus you tied up margin and attention.
• Asymmetry created: a string of small booked gains cannot cover one full premium loss when you let losers go to zero, which is exactly how 89 percent of F&O traders ended up in the red.

Why the Bias Is More Expensive in F&O Than in Delivery Stocks

In delivery equity, a losing stock that you refuse to sell still has some value, and it can recover over months or years. An out of the money option has a hard deadline. Nifty weeklies, Bank Nifty monthlies, and stock options, all expire on a fixed schedule, and once they expire out of the money the premium is gone forever. The disposition effect, which whispers hold and wait, is far more destructive when there is a clock running against the position. Time decay does not negotiate.

There is also a leverage problem. A single lot of a Nifty option controls 65 units of the index, so a small adverse move can wipe out a large fraction of your premium quickly. Traders affected by the disposition effect often respond by averaging down, buying more of the losing option to reduce the average cost, which simply increases the size of the position that can go to zero. The 2023 and 2024 SEBI data on F&O losses is the aggregate result of millions of these decisions.

• Hard expiry: options can go to zero, so a held loser is not a paper loss that can wait, it is a deadline you can miss.
• Leverage: one Nifty lot is 65 units, so the rupee swings are large relative to the premium paid.
• Averaging down: adding to a losing option enlarges the position that theta can destroy.
• Taxes: F&O is treated as business income, so the loss is real business loss, not a gentle capital loss with indexation comfort.

The Tax Angle: How Indian Rules Interact With the Bias

Indian tax rules can quietly reinforce the disposition effect, and understanding them helps you separate a smart tax decision from a biased one. In delivery equity, Short Term Capital Gains (STCG) on listed shares held up to 12 months are taxed at 20 percent, and Long Term Capital Gains (LTCG) above Rs 1.25 lakh in a year are taxed at 12.5 percent. Some traders hold a loser hoping to convert a short term position into long term for a softer rate, which is a real consideration, but it must be a deliberate plan, not an excuse to avoid the pain of selling.

Futures and options are different. F&O profit and loss is treated as business income, taxed at your slab rate, and there is no LTCG or STCG distinction. That means there is no tax based reason to hold a losing option, and every reason to cut it before time decay finishes the job. On the cost side, remember Securities Transaction Tax. STT on selling options is 0.1 percent of the premium, and on selling futures it is 0.02 percent of the trade value, charged on the sell side. These charges, along with brokerage and GST, mean even a position you exit at break even on price can be slightly negative after costs, which is one more reason not to let losers drift.

The Psychology Underneath the Numbers

The disposition effect sits on top of a few well studied mental habits. Loss aversion, from Prospect Theory, means a Rs 5,000 loss hurts roughly twice as much as a Rs 5,000 gain feels good, so we go out of our way to avoid the act of realising a loss. Mental accounting means we treat each position as its own little ledger that must be closed in profit, instead of looking at the whole portfolio. Regret aversion means we fear the regret of selling a stock that then bounces more than we fear the loss itself.

There is also a reference point problem. Once you buy at a price, your brain anchors to that buy price as the line between win and loss, even though the market does not care what you paid. A stock at Rs 800 that you bought at Rs 1,000 is not cheap because you paid more, it is simply a Rs 800 stock, and the only honest question is whether you would buy it today at Rs 800. If the answer is no, the buy price is irrelevant and holding is the bias talking.

For Indian retail traders, social and family pressure can sharpen all of this. Admitting a loss out loud to a spouse, a friend, or a trading group feels like losing face, so the position stays open as a way of postponing the admission. None of these feelings are unusual, and recognising them by name is the first step to overriding them with a rule.

How to Beat the Disposition Effect With Rules, Not Willpower

You cannot feel your way out of a feeling, so the working solution is mechanical. Decide your exit before you enter, in writing, for both the upside and the downside. A common framework is a fixed risk per trade, say 1 to 2 percent of capital, with a stop loss placed at the level that proves your idea wrong, and a target or a trailing rule for winners so you do not cut them on emotion. When the stop is hit, the position closes, no debate, no waiting for a bounce.

• Set a stop loss the moment you enter, ideally as an actual order at the broker, so the exit does not depend on your mood that day.
• Define winners management in advance, for example trail the stop up or scale out in parts, so you stop guillotining gains the instant you are green.
• Cap risk per trade at a fixed percent of capital, which keeps any single held loser from doing serious damage.
• Avoid averaging down on a losing option, since it grows the position that time decay can zero out.
• Review your trades weekly and compute your own PGR and PLR, turning the bias into a number you can shrink over time.

A trading journal is the single most useful tool here, because it converts the disposition effect from an invisible habit into a measured statistic. By logging every entry, exit, reason, and emotion, you can look back at the end of a month and literally count how many winners you cut early and how many losers you held too long. Once the gap is on a screen in front of you, it stops being abstract, and most traders find the simple act of measuring it starts to close it.

Sources and Further Reading

For authoritative data and further reading, see Terrance Odean's paper Are Investors Reluctant to Realize Their Losses, the SEBI study on profit and loss of individual traders in the equity F&O segment, Zerodha Varsity, SEBI Investor Education and Investopedia. Keeping a trading journal is the most direct way to measure your own bias. Always confirm current rules, rates, tax treatment and contract specifications on the official source before you trade.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to Zerodha Varsity, Investopedia and SEBI Investor Education. Always confirm current rules, rates and contract specifications on the official source before you trade.