The plan gap

The plan gap is the difference between how traders plan to act and how they actually act. donttrade measures it from account-level records. The disposition effect is the first part of it we measure, not the whole story.

What it is

Most traders can say what they intend to do: cut a losing position at a set point, let a winning one run, stop after a bad day. The plan gap is what happens between that intention and the trades that follow. It is about behaviour, not about whether any trade was a good idea, and it does not say what anyone should trade.

What the research says

Heimer, Iliewa, Imas and Weber (“Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field”, NBER Working Paper 30910, 2023) compare people’s risk-taking plans with their later decisions, in a brokerage dataset and in a series of experiments. Across settings, people plan a “loss-exit” strategy: keep taking risk after gains, stop after losses. Their actual behaviour departs from it in a set direction: they cut gains early and chase losses. More people accept risk when offered a way to commit to their first plan.

Fischbacher, Hoffmann and Schudy (“The Causal Effect of Stop-Loss and Take-Gain Orders on the Disposition Effect”, Review of Financial Studies, 2017) tested two aids in a laboratory experiment. Automatic stop-loss and take-gain orders, which carry out the plan without a further decision, reduced the disposition effect. A reminder of the plan when a limit was reached did not significantly reduce it.

These are other researchers’ findings, summarised from their published abstracts. They are not donttrade measurements.

What donttrade measures today

One measure: the disposition effect, selling winning positions more readily than losing ones, computed with Odean’s method (glossary). It stands in for a plan most traders say they hold, cut losses and let winners run; it does not see any one trader’s written plan.

• Direction, not size. In our public study, the direction of the effect survived a holding-age control, but its size depends on how “gain” is timed and is uncertain, and a V-shaped selling pattern is not ruled out. Robustness update →
• A corrected headline. A second study’s headline, that the effect was much stronger on days a trader’s other holdings were mostly down, did not survive a stricter test. The correction →

What it is not

• Not a score of any person, and not a grade, badge or seal.
• Not advice, a signal or a forecast. It describes what was done, not what anyone should do next.
• Not yet a measure against a trader’s own written rules. When other measures are added, each will be defined in writing and tested on made-up data before it is used.

Every study, its script and every correction are on the Research and Code pages.