Biases distort our view of the world and lead us to make wrong investment decisions. When written down simply, we can laugh at the simplicity and boast that we would never be taken in. However, it will happen to you time and again. Let me illustrate with two stories, one personal and one involving one of the best investors around.
1. About twenty years ago, I made a specific share recommendation to someone very close. When the shares didn’t perform and ill health curtailed his investment activities, he gifted those shares to me. Over the next few months, those shares dropped in price but there was no way I would sell and admit the loss. Eventually, the company closed and the shares were worthless.
2. Contrast this with how Nassim Nicholas Taleb (of Black Swan fame) talks about George Soros. How he has absolutely no hesitation to admit that he was wrong and can make significant investment decisions that are completely at odds with his prior policies. Ruthless is a word sometimes used, but I would say that he is free of this bias.
Anyway, let’s return to the official description of the Endowment effect. Basically, it asserts that we value more highly things that we own. Whether these are assets, shares, or opinions. If they are “ours” we will hold on to them longer than we should.
What do you have in your portfolio that should have been sold or closed out months ago? How honest are you about the true value of your investments?
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