Have you ever heard of the endowment effect? It is the finding that people are more likely to retain an object they own than acquire that same object when they do not own it.
“One of the most famous examples of the endowment effect in the literature is from a study by Daniel Kahneman, Jack Knetsch & Richard Thaler, in which participants were given a mug and then offered the chance to sell it or trade it for an equally valued alternative (pens). They found that the amount participants required as compensation for the mug once their ownership of the mug had been established (“willingness to accept”) was approximately twice as high as the amount they were willing to pay to acquire the mug (“willingness to pay”)…It was proposed by Kahneman and his colleagues that the endowment effect is, in part, due to the fact that once a person owns an item, forgoing it feels like a loss and humans are loss-averse.”
If we pay more for something, the internal value increases, and the potential pain of loss feels greater. As such, there is, even more, of a reason to ‘hold’ onto ownership.
In the world of investing, this can mean holding onto investments far longer than you should.
And of course, changing your mind can endorse a feeling of ‘mistake’ and it’s hard to say you made a mistake.
Investment institutions and wealth managers understand that if they can encourage you to buy now, you’ll tend to stick with your decisions even when better alternatives make sense.
As an investor, you need to counter the endowment effect. It’s time for a great conversation.