Greed is not good for Investing

Happy Sunday.

Investor psychology never gets old for me. I've used behavioral finance in my own investment process for years, and the one thing that keeps bugging me is this: there's no grand unified theory tying all the biases together. So what happens when two biases that should cancel each other out actually collide?

Take greed versus the disposition effect.

Greed is simple. Investors want more money and higher returns than they actually need to hit their goals. When they buy a stock that's working, greed says hold it, ride it higher, squeeze every last dollar out of it.

The disposition effect says the opposite. It's the well-documented tendency for investors to sell their winners too early and bag-hold their losers for too long. It's one of the most reliable ways people destroy their own returns over time.

So here's the obvious question: wouldn't greedier investors be less likely to sell winners early? Greed should override the disposition effect, right? That's what I would have guessed.

Turns out, the opposite is true.

Researchers at Auckland University of Technology found that greedier investors actually show a stronger disposition effect than average. Not weaker. Stronger.

Quick caveat on the study: it used just 60 university students in a lab setting, so take the sample size for what it is. But the effect size was large enough to pay attention to.

The setup was straightforward. Volunteers filled out a questionnaire that scored their greediness on a seven-point scale (the average participant landed around three). Then they played simulated stock market games where they could sell or hold positions as prices moved.

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Here's where it gets interesting. For every one-point bump on the greediness scale, the disposition effect doubled. That's not a typo. Doubled. The driver was almost entirely on the sell side: greedier participants were 12 percent more likely to cash out winners and 6 percent less likely to cut losers.

The cost was real. In the simulation, investors who sold a winning position would have gained another 7.5 percent if they'd just held for four more periods.

Now, I'll be honest, I'm not entirely sure what to do with this. But here's my working theory.

Greedy investors aren't actually greedy for money. They're greedy for bragging rights. They want to tell someone, "I bought that at 40 and sold it at 80." The realized gain is the trophy. It's not about the return on capital. It's about the story they get to tell at dinner.

Greed, in that framing, is really a status play. The money is just the scoreboard. And if that's true, it means these investors are literally paying for social validation with forgone returns.

Something worth thinking about the next time you feel that itch to lock in a win.

Stay curious 😎

- John

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