Larry Swedroe’s new book, Investment Mistakes Even Smart Investors Make and How to Avoid Them, includes 77 common behavioural blunders. I don’t think there’s anyone alive who hasn’t made at least a dozen of them. In fact, I just spoke to an investor about falling prey to Mistake 11 in Swedroe’s catalogue, which goes like this: “Do You Let the Price Paid Affect Your Decision to Continue to Hold an Asset?”
This error is what behavioural economists call the endowment effect. It’s what makes us place a greater value on something just because we happen to own it.
Imagine that you want to attend a hockey game. You don’t yet have a ticket, and you decide that you’re willing to pay no more than $100 for one. The next day, you win a ticket to the game in a radio contest. If a friend offers to buy that ticket from you, for what price would you be willing to sell?
If you were purely rational, you would accept any price over $100, since that’s the maximum value you placed on the ticket before you had one. But if you’re subject to the endowment effect,