In the previous few posts, I have touched on the topics of Anchoring Effect, Prospect Theory, Endowment Effect and Narrow Framing in the book review of Thinking, Fast and Slow by Daniel Kahneman.
Building on the concept of prospect theory and loss aversion, we will talk about a long standing irrationality of investor behaviour that may have investment impact on your portfolio.
Which would you sell?Imagine that you are presented with the following scenario:
You need money to cover the costs of your daughter’s wedding and will have to sell some stock. You remember the price at which you bought each stock and can identify it as a “winner,” currently worth more than you paid for it, or as a loser.
Among the stocks you own, Blueberry Tiles is a winner; if you sell it today you will have achieved a gain of $5,000. You hold an equal investment in Tiffany Motors, which is currently worth $5,000 less than you paid