Why Don't People Advise You To Sell Your Stocks? - Part 2

Why Don't People Advise You To Sell Your Stocks?

I have always wanted to find out why value investors have so much difficulties in selling a stock and I happen to overheard something from the No-Sell-Horse's mouth:

"no sell unless the biz fundamentals deteriorate as evident by poor mgt decisions and repeated quarters of decline"

When bad news on the stock hit the market, the stock price don't just fall, it will plunge like a falling knife! Falling more than 40-50% is not uncommon. Will you still have the heart to sell? Likely not. Due to Endowment Effect.


From Wikipedia, the free encyclopedia

In behavioral economics, the endowment effect (also known as divestiture aversion) is a hypothesis that people value a good or service more once their property right to it has been established.

In other words, people place a higher value on objects they own than objects that they do not. In one experiment, people demanded a higher price for a coffee mug that had been given to them but put a lower price on one they did not yet own.

The endowment effect was described as inconsistent with standard economic theory which asserts that a person's willingness to pay (WTP) for a good should be equal to their willingness to accept (WTA) compensation to be deprived of the good. This hypothesis underlies consumer theory and indifference curves.

The effect was first theorized by Richard Thaler. It is a specific form, linked to ownership, of status quo bias. Although it differs from loss aversion, a prospect theory concept, those two biases reinforce each other in cases when the asset price has fallen compared to the owner's buying price. This bias has also a few similarities with commitment and attachment.