Investment Psychology Dictionary: Endowment Effect—It's Not the 'Value' That Makes It Hard to Let Go, It's 'Because It's Mine'
Key Points
Endowment Effect = The psychological tendency to value one's own possessions higher than their actual worth. In stocks, it makes 'the stocks I bought' seem special, leading to delayed selling.
How to Use: If you are hesitant to sell, ask yourself: 'Would I buy this from scratch at this price right now?' If the answer is NO, it is a sign to suspect the endowment effect.
1. Definition
The endowment effect is a bias where the valuation of an item increases simply by owning it. In the market, this leads to thoughts like 'the stocks I bought will still grow' or 'this stock is different,' making it
hard to let go.
2. Situations Where It Often Occurs
Even when unrealized gains are cut in half, you postpone taking profits, thinking 'it's still too early to sell'
Even when bad news comes out in earnings, you gently dismiss it as 'temporary noise'
You justify holding onto a stock because of the emotional attachment that 'this stock is my masterpiece'
When someone asks you, 'Would you want to buy this again from this price right now?', you find it difficult to answer
Point: You can judge calmly when looking at 'stocks held by others,' but your hands stop when it comes to 'your own stocks'—this difference is a sign of the endowment effect.
3. How It Distorts Investment
Delayed profit-taking: Missing out on profits due to the belief that 'it will still go up'
Delayed loss-cutting: Locking in unrealized losses due to the belief that 'I am not wrong'
Portfolio bias: The more time you spend researching a stock, the more emotionally invested you become, deviating from risk management
All of these start with 'special treatment'. The weight is determined by emotion, not numbers.
And the scariest part is that because you think 'I am being calm,' it is
hard to notice the distortion.
4. Self-Check (3 Questions)
A checklist to see if the endowment effect is affecting you right now.
If you didn't own this stock yet, would you want to buy it new at the 'current price'?
Even though you can state your 'reasons for selling,' are you somehow only talking about your 'reasons for holding on'?
Are you talking about that specific stock based on 'attachment' rather than evaluation?
If any of these apply to you, there is a high probability that the endowment effect is influencing your judgment.
5. How to create distance
Things you can do to reduce trading driven by the endowment effect
Someone else's account move: Pretend 'this is someone else's account' and write down advice as a third party
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Write based on conditions: Instead of feelings, put rules into writing
Price condition: 'Sell if it falls below X yen'
Factual condition: 'Sell if a concrete sign that the growth story is collapsing appears'
Forbidden words: Exclude 'attachment / believing in it / wanting to support it' from trading decisions. If they appear, it's a yellow light
6. Neru's Pocket Memo
The endowment effect is the investment version of love is blind. It is not a bad habit, but standard human equipment. Just by preparing a
moment to realize 'I am in endowment effect mode right now,' your next choice will become easier.
The endowment effect is not something to be ashamed of; it is a reaction that occurs in many investors.
(Our brains are wired to prioritize 'protecting' over 'letting go')
What is important is to have a moment prepared where you can realize, 'I am currently in endowment effect mode.'
Just knowing that will make your subsequent choices a little easier.
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■ Related (if you want to read further)
・Unrealized gains are an illusion — On the feeling of being swayed by unrealized profits
・My process for cutting losses in stock investment (a stylistic beauty) — A discussion on the 'form' used when actually letting go
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