DON’T CLING TO THINGS Endowment Effect

When we own something, the value of that particular things has psychologically increased for us. Loss aversion stops us from giving up what we own. We are slowly getting emotionally attached to particular products and automatically the value of that product increases for us.

We consider things to be more valuable the moment we own them. In other words, if we are selling something, we charge more for it than what we would be willing to spend for the same thing. We get attached to things we own and we keep on collecting different things. We can safely say that we are better at collecting things than at casting them off. Not only does this explain why we fill our homes with junk, but also why lovers of stamps, watches and pieces of art part with them so seldomly.

We should understand that everything which we own is given by the universe to us for temporary time so should not get attached to it. These things can get separated from us in the blink of eyes.

Business – We can see that owner of the business who is facing losses then also not ready to sell off the business. Also, they seek higher prices to divest business though business incurring losses. The founder of the business is emotionally attached to the business and want to focus on making it profitable. 

Investment – When we own any stocks in our portfolio then we value it more and think that all others own fewer valuable stocks in their portfolio. We tend to sell our ownership for more than what it’s demanded. We feel portfolio companies have higher value and should trade higher than our acquired price. We also keep on purchasing stocks and then when we have owned it, we want to sell it for higher.

This attachment with our portfolio makes us blind to make a rational decision. That’s the reason our portfolio gets flooded with junks and we sell quality because the quality we can sell at a higher value than what we own.

Rather than keep focusing on the purchase price, we should focus on what is a current intrinsic value and fundamental of the company. When we start to avoid looking at the purchase price, the time we start reducing a few mistakes. First, we should write down the exit strategy during the entry time itself and follow it thoroughly. When our exit strategy has been triggered, we should not look at the trading price and dump a particular investment. A clear strategy helps us from the endowment effect.

This entire series will be review with various examples from books which are Thinking, Fast and Slow and The Art of Thinking Clearly.

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