The Endowment effect a really difficult challenge

Biases distort our view of the world and lead us to make wrong investment decisions. When written down in a simple way we can laugh at the simplicity and boast that we would never be taken in. But 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 specfic 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 which 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 lets return to the official description of the Endowment effect. Basically it asserts that we value more highly things which we own. Whether these are assets, shares or opinions if they are “ours” we will hold on them longer than we should.

What do you have in your portfolios that should have been sold or closed out months ago? How honest are you about the true value of your investments?

This article was written by Mike Holly. Mike lives and works in Northumberland ( UK)

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