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How the Endowment Effect Hurts Investors

The endowment effect is a phenomenon first described by Richard Thaler and Daniel Kahneman back in 1980. People value items more if they own them than if they didn’t. Ownership endowed the item with more value.

The article I share today shows how this could play a role in hurting investor’s returns:

The Psychology of Investing #7: The Hidden Cost of Ownership [Safal Niveshak] – “However, in a lot of such instances, instead of accepting my mistake and reality, and selling and cutting my losses, I held on, convinced that the stock will return to its former glory. I told myself, “It was worth ₹1,000 once. It must certainly be worth that again.”

But, you see, the market doesn’t care what you think. Worse, the market doesn’t even know you own the stock.”

I’d also argue that inertia likely plays a role too. It’s easier to stand pat and not sell a stock. It’s harder to press the sell button and realize those losses.