{"id":9798,"date":"2021-08-30T04:27:59","date_gmt":"2021-08-30T04:27:59","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9798"},"modified":"2022-02-26T13:05:37","modified_gmt":"2022-02-26T13:05:37","slug":"how-investor-biases-affect-buy-and-sell-decisions","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/how-investor-biases-affect-buy-and-sell-decisions\/","title":{"rendered":"How Investor Biases Affect Buy and Sell Decisions"},"content":{"rendered":"\n<p><em>Frank H. from Port Arthur, TX asks: <\/em>Hi Mitch, I\u2019m\ncurious if you have any insights on knowing when to sell? It\u2019s difficult for me\nanytime I buy something that goes up (can it go up more?) or if I own a loser\nthat I don\u2019t want to sell at a loss. Is there a good rule-of-thumb out there\nthat I\u2019m missing?<\/p>\n\n\n\n<p><strong>Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n<p>That\u2019s a great question, Frank, and I know that plenty of investors\ngrapple with this issue. I can see from your question that there seems to be a\nlot of emphasis on price, i.e., how much-unrealized profit or loss you have on\na particular position driving whether or not you should sell. There is a hazard\nwith this approach you should watch for, which is known as the \u201cendowment\neffect.\u201d<sup>1<\/sup><\/p>\n\n\n\n<p>The endowment effect was coined by behavioral economist,\nRichard Thaler, here at the local University of Chicago (Zacks Investment\nManagement is headquartered in Chicago). It says that the value you place on an\nasset greatly depends on whether or not you already own it. <\/p>\n\n\n\n<p>__________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/zim-market-correction-guide?source=zim&amp;medium=blog&amp;term=mitchsmailbox_market_correction_zim_08_27_2021&amp;content=market_correction_guide \">Guard Your Investments Against Market Correction!<\/a><\/strong><\/p>\n\n\n\n<p>When you get bad news of the market plunging, it\u2019s easy to\nfeel discouraged and scared for your investments. Understand that this feeling\nis completely natural, but it\u2019s better to understand the history of market\ncorrections to better prepare yourself.<\/p>\n\n\n\n<p>Our newest, free guide, <em>4 Keys to Navigating a Stock\nMarket Correction<\/em>, offers ways that you can guard your investments against\nmarket correction, such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The #1 mistake investors make when the market plunges<\/li><li>How knowing market history can help ease your mind<\/li><li>The silver lining in every market correction, and how to take advantage of it<\/li><li><strong>Plus, more ways to navigate a correction and protect your assets<\/strong><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn\nmore, click on the link below to get your free copy:<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/zim-market-correction-guide?source=zim&amp;medium=blog&amp;term=mitchsmailbox_market_correction_zim_08_27_2021&amp;content=market_correction_guide \">Download \u2013 <\/a><em><a href=\"https:\/\/go.steadyinvestor.com\/zim-market-correction-guide?source=zim&amp;medium=blog&amp;term=mitchsmailbox_market_correction_zim_08_27_2021&amp;content=market_correction_guide \">4 Keys to Navigating a Stock Market Correction<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/zim-market-correction-guide?source=zim&amp;medium=blog&amp;term=mitchsmailbox_market_correction_zim_08_27_2021&amp;content=market_correction_guide \">2<\/a><\/sup><\/em><\/strong><\/p>\n\n\n\n<p>__________________________________________________________________________<\/p>\n\n\n\n<p>In other words, owning a stock with an unrealized gain will\nmake you feel like a successful investor that is likely to be even more\nsuccessful while owning a stock with an unrealized loss will make you think\nit\u2019s only a matter of time before shares rebound. As you can see in both cases,\nsimply owning the stock gets in the way of making an objective decision \u2013\ninvestors want to be right no matter what. <\/p>\n\n\n\n<p>Thaler and a group of economists started to close in on this\ntype of investor behavior in the 1980s, when they ran an experiment using\ncoffee mugs. There were three groups in the experiment:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The first group had the option to buy a coffee\nmug;<\/li><li>The second group could choose to receive either\ncash or a mug; and,<\/li><li>The third group was given a mug and the ability\nto sell it. <\/li><\/ul>\n\n\n\n<p>When it came to assigning a price to the mug across the\nthree groups, the value of the mug differed greatly based on whether or not a\nperson already had it in their possession. The first group that had the option\nto buy the mug thought it should be worth $2.87, while the people who already\nhad the mug thought its value should be $7.12. <\/p>\n\n\n\n<p>When investing, it is important to consider that the\nendowment effect may be in play for stocks and holdings already in your\nportfolio. You may be reluctant to sell one of your winners that has gone bad\nor even to <em>acknowledge<\/em> that something has gone wrong. On the other end\nof the spectrum, the endowment effect could cloud your ability to see that one\nof your investments was never good to begin with. <\/p>\n\n\n\n<p>One of the biggest features of knowing when to sell is\ngetting past the endowment effect and staying true to your thesis to own. When\nyou buy a stock or an asset, there were fundamental reasons for the purchase \u2013\ndo those fundamental factors still apply? Other questions to ask are if you did\nnot already own the holding, would you buy it now? Or is there something else\nthat better aligns with your strategy and thesis to own? <\/p>\n\n\n\n<p>At the end of the day, a major part of successful investing,\nin my view, is knowing how to \u2018get out of our own way\u2019 and creating a\nrepeatable, well-defined investment process that is driven by research and\nfundamentals\u2014not gut feelings or past performance.<\/p>\n\n\n\n<p>With that being said, now is the perfect time to base your\ninvesting decisions on research and fundamentals. Volatility has shifted the\nmarket in many ways this year, and for those who are afraid another stock\nmarket correction is around the corner, we want you to be prepared for it. <\/p>\n\n\n\n<p>To help you do this, we have created a guide, <em>4 Keys to\nNavigating a Stock Market Correction<sup>3<\/sup>.<\/em>. This guide answers\nquestion like \u2013 <em>Are there any silver linings that come with it? What are\nsome ways to navigate through it? <\/em><\/p>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn\nmore, click on the link below to download our latest guide: <em>4 Keys to\nNavigating a Stock Market Correction<sup>3<\/sup>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The &#8220;endowment effect&#8221; argues that the value investors place on an asset depends in large part on whether they already own it.<\/p>\n","protected":false},"author":3,"featured_media":7436,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-9798","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9798","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9798"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9798\/revisions"}],"predecessor-version":[{"id":10326,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9798\/revisions\/10326"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9798"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9798"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9798"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}