Endowment Bias

Endowment bias can be thought of as “falling in love with an investment” in other words getting too emotionally attached. This investment may have performed fantastically well for you in the past and now you find yourself reluctant to sell any of it. Of course, this could be for perfectly rational reasons – the investment could be stock in a company that is a long-term winner in its industry and that is still blessed with tailwinds that support further growth. However, it may be an investment that, although it has performed admirably in the past, maybe past its best and it could be time to reallocate the capital tied up in the investment to more promising opportunities.

Potential solution: To prevent endowment bias from clouding your investment decisions, it can be worth asking yourself “does this investment still offer compelling opportunities for future growth, and, if I didn’t already own it, would I buy it today?” If the investment has grown to a sizeable proportion of your total portfolio, it is also worth asking “how would I cope if this investment were to suffer a large decline in value?”   It is important to note that not all investors will be susceptible to exactly the same biases. We are all perfect (and imperfect) in our own special way! You are the best judge to identify which biases have the better of you. Recognize these biases when you are exhibiting them and deliberately make an attempt so they do not cloud your investment judgment.

Leave a Reply

Your email address will not be published. Required fields are marked *