Side effects of having an ownership bias while investing.

In 2010, Mr. Dumb bought a flat for his personal on Link Road, Bandra. He paid Rs 2.5 crores for that flat and expected the price to go up by 50% in 4 years.

Now in 2014, there is a buyer who intends to purchase his flat for Rs 3 to Rs 3.25 crores but Mr Dumb refuses to sell it at this price.

The fact remains that the price of resale flats on Bandra link road area has not broken this range over the past 2 years. But still most people living in this area see to be having a tendency to demand much more while selling their asset.

This is because generally people overvalue their own investments just because they own it and have certain attachment value. In other words, “once you own something you start to place a higher value on it than others would”. This is known as endowment effect.

In another instance those who have invested into oil and gas refinery stock over the last 2 years are and would hold onto their investment even though the price is not going up. They are never inclined to sell and move on with some new purchase. They would rather believe that very soon the fortunes of these stocks would change. They never realize the inflation effect or the time effect. While they are facing losses year on year for holding on to these stocks they cannot muster up the courage to offload and reload something else.

It is important to understand the life is a marathon and with time our world undergoes massive change and never should we assume even for a second that time has come to a standstill. We need to understand that every second counts and has losing time is losing money.

Hence it is vital that we set realistic goals and track the performance of investment products. While we are not meant to be fickle minded and make changes at the drop of a hat at the same time we also need to realize that at times we need to be dispassionate end exit investments even if at a loss. This is popularly known as “Stop Loss”.

It’s important to sell at specific price whether you are in profit or in loss based on market conditions and opportunities. This is how a fund manager operates. So, that we do not have to confront such problems of decision making. It makes immense sense to invest in mutual funds rather than stocks by investors.