What traders always known...

Victor90

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I read today in The Economist:

"An object is worth more to you if you already own it. Researshers found that some Cornell students who would choose a chocolate bar over a coffe mug start to prefer the mug once they had been given one. This "endowment effect" has been spotted with all sorts of things, from basket ball tickets to shares."

That may be one reason why we find it harder to exit a affair than to enter it, becuse we own the share. :)
 
That may be one reason why we find it harder to exit a affair than to enter it, becuse we own the share.

I cannot see how this theory works when you are short selling stocks ?


Paul
 
I cannot see how this theory works when you are short selling stocks ?


Paul
Maybe because many people emotionally or psychologically "own" the position they take regardless of whether they own the underlying security.

The attachment and ownership mentality is what is important.

Cheers,
PKFFW
 
I cannot see how this theory works when you are short selling stocks ?
Perhaps we 'own' the trade rather than any derivative of reality the trade represents?

Similar recent research showed that people were willing to sell a lottery ticket they had been given for the face value of the ticket, but would add a premium to sell a ticket for which they themselves had selected the numbers.

We don't want to start opening up Skinner's Box again, do we.....
 
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Researshers found that some Cornell students who would choose a chocolate bar over a coffe mug start to prefer the mug once they had been given one

Therefore, some didn't.

The End.
 
this sounds good.......

In California lore there is the story of a 1940s gang that operated profitably on the sun-blistered highway stretching between Lost Angeles and Las Vegas. The gang would steal orange cones from a street maintenance crew and distribute them in a gentle curve across the highway in the middle of the desert. Travelers driving to Las Vegas were detoured onto a dirt track that eventually petered out in dust and greasewood, and there they would be ambushed and robbed by four men with machine guns and sent reeling back to Los Angeles in their underwear.

There are many ways to get detoured off the high path of life. Bad investments, bad marriages, the wrong occupation will all do the trick, and they all begin with legitimate-looking diversions. Whole societies can get detoured, trapped into crippling wars or imprisoned within their own borders by charismatic dictators. All start as sensible-looking ventures and on the way, nobody guesses destiny.

Our exorbitant materialism is a loss of the way. We did not come to a point of ownership-obsession overnight, nor did it descend one day like a sun-darkening cloud of locusts; it is a coloring that has been gathering slowly within. In 1966, when college freshmen were surveyed about what they were going to do with their lives, 44 percent said it was important or essential to become well off financially, but by 1996 that had risen to 73 percent. Conversely, back in 1966 a full 83 percent said it was important to develop a philosophy of life, but by1996 that had dropped to 42 percent [1]. On a graph, the ascending line crosses the declining line in a stark X; it is clear one motivation has displaced the other. Nowadays, it is rare to hear about a philosophy of life; money and property have become our main attention. We believe we are what we own.

Where is materialism taking us? Does money make us happy? Actually, Jeremy Bentham led us astray when he stated that money is the most accurate measure of pleasure. Recently a collection of studies has revealed that in fact rich people are not happier, and that adding wealth to your life does not increase your sense of well being (unless you live below the poverty line) [2]. Moreover rich nations are not always healthier: the recent discovery is that people in egalitarian nations live longer than people in richer nations that are hierarchical [3]. But people think money will make them happier, and that’s what motivates them.

Psychological studies show that it is actually companionship and family that make people happier. So we are immersed in both sides. In practice, money corrupts friendship and money problems are second only to infidelity as a cause of divorce [4]. Observe, says Yale’s Robert Lane, a simultaneous national growth of wealth and depression. In The Loss of Happiness in Market Democracies, he puts it this way: there is “a titanic conflict between the oldest human institution, and the newest, the market” [5]. Statistics bear him out. We are richer than ever, and huge numbers are using prescription antidepressants. Severe depression is 10 times more prevalent that it was 50 years ago, and suicide is the third highest cause of death in young people.

The triumphant free market does not care. Lane says it is Darwinian, indifferent, a winnowing process, amoral, with no concern for what happens to persons.

cont.....

Materialism, a deepening shadow
 
I read today in The Economist:

"An object is worth more to you if you already own it. Researshers found that some Cornell students who would choose a chocolate bar over a coffe mug start to prefer the mug once they had been given one. This "endowment effect" has been spotted with all sorts of things, from basket ball tickets to shares."b

That may be one reason why we find it harder to exit a affair than to enter it, becuse we own the share. :)

Sounds like The Economist has been Googling Wikipedia to fill a bit of space quick-like with a paraphrase: Endowment effect - Wikipedia, the free encyclopedia .......

Notwithstanding that, is this not something to do with our natural desire not to be wrong? ie. I obtained the mug through my excellent judgement (in accepting what I've been given) therefore i'll have another. Who likes to admit they bought into a duff share or position? It's a big psychological hurdle to admit that your judgement was bad or incompetent - because that's how we think others will see it - (and of course often do, even though they might have done the same. Don't we all criticise the Boss until we're in his boots & then realise how hard it can be?)

Some people (mostly blokes - the girls find it easier to admit they are wrong) after having bought a car they later find they don't like, don't talk about it too much but just get rid of it. (Unless of course you had a British Leyland masterpiece, in which case the crowd mentality said it was ok to slag it off - just had to say it wasn't you personally that decided to buy it).

Despite some people saying that entries don't matter I believe they do: the more you get right the less you have to face up to the "I made a wrong decision" syndrome. It takes (it certainly did me) a lot of mental determination to get to the stage where you look at a trade and say "it's wrong - i'm getting out" I still find that hard, and you should do that before hitting your mental stoploss if it's obviously going wrong. You know that feeling - but it's so hard to act upon.

I also find it hard not to associate a share's name or reputation (can't speak for forex - that's a big boy's toy) with trading potential. But even rubbish companies offer opportunity (and vice-versa) so i think you have to approach this in Mr Spockian mode and just look at the facts / evidence and make a logical decision. You can't do that if you know the name (well you can actually, after you've honed your psychologicals) so cover it up!

So, we don't like to be wrong - that ain't gonna change.

PS having re-read this, bear with me if you think it's got little to do with endowment effect.
 
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It's got a lot to do with the endowment effect and how not to get married to your position.

I take many losing trades. Far more than winning ones. It’s not that I don’t want to be wrong, I simply don’t care. If I get in and I’m wrong, I get out – quickly. And back in again, if circumstances prevail, and so on – till I’m right. And I stay in till I’m wrong again.

The opposite of the endowment effect. I don’t own my positions, just the P (or L) on the cumulative closed trades.
 
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