The Effectiveness of Sell Discipline Strategies in Institutional Portfolios

Ryan Kennedy, University at Albany, State University of New York


Prospect theory predicts that individuals will be risk seeking when faced with a potential loss. An implication is that investors may be reluctant to sell losing stocks, leading to potentially greater losses. This study explores whether institutional portfolio performance is significantly related to the manager’s stated sell discipline strategy. Six distinct sell discipline approaches are compared using four performance metrics. As predicted by prospect theory, this study finds sell discipline to be a statistically significant factor in performance for all performance metrics. The results also show that the best sell discipline strategy is dependent on which performance metric is used.