Why You Still Own It

Understandably people have difficulty believing they have ridden a particular stock down (say from slightly above __ to its present price). The answer isn’t that their IQ is below average or that they are otherwise somehow intellectually deficient.

The answer lies in normal human psychological traits which only very experienced professional money managers (say for example Buffett ,Munger or Soros) overcome.

What are those traits? The first is what behavioral economists call “anchoring” and the second is what is called “loss aversion.” The first is not always a necessary ingredient unless the owner tends to hold the stock over time. The longer the time the more significant “anchoring” becomes as a cause of “riding it down.”

Anchoring is a well documented tendency people engage in when asked to analyze something and then make a decision. They establish a reference point – often one that is suggested to them. In the markets the suggested reference point is the price of the security. What price? Almost always it’s the purchase or acquisition price initially. As time goes on (studies say approximately 12 months) the reference point or “anchor” becomes the high for the period in question. For us that morphed into a price somewhere between __ and __ (I will explain why we didn’t lower it as the market price declined or at least to the extent of its decline). What happened to us is that we did not use our actual cost basis but instead used our reference point as our “basis” for making our decision. Anchor is a good choice for the word that describes this trait. It’s heavy and it’s very stubborn and resistant to change once it is set in its place.

There is a second trait that comes into play here and is the real killer. That trait, again well documented, is “loss aversion.” Two prominent economists conducted a study on this phenomenon (other studies followed and confirmed). In short we now know that people have an intense desire to avoid taking a loss from an unrealized (potential) state to a realized (actual) state. Neuroeconomic studies tell us that those portions of the brain which are associated with the emotions of fear and regret become highly active when subjects are forced to decide whether to realize a loss or postpone it. This explains two things. First, why the reference point (anchor) we pick to evaluate whether something is a loss is what economists call “sticky upward” (or when the market price goes up people will move their reference point up but will not move it down when the market price goes down). Second it explains why we ride the stock down – neurons are firing in the portion of your brain (the amygdala) that is telling you to avoid the regret one experiences when the “game” score is final and its a loss (book it Danno). This is subconscious and involuntary (meaning compulsive).

Don’t feel so bad, two geniuses were also significantly affected by this, Newton and Clemens.


Advisors such as Buffett and Soros tell us: never lose track of why you are holding the stock. From time to time reevaluate a particular holding and when you do - evaluate whether you would then make a purchase of the stock (assuming you had some money). Such an evaluation should be a major component in your decision to hold vs. sell 2. Oh and be aware what your anchor is and why you are using it as opposed to a different reference point.


1. Behavioral Economists use the term “disposition effect.”
2. When we have a position that is declining and has been from time we undergo stress. If that decline continues for a sufficiently long time that stress becomes chronic. Chronic stress is debilitating and eventually it overcomes “Loss Aversion.” Chronic stress is the chief cause for investors “throwing in the towel” and abandoning a position that has declined over a significant period of time. This action is taken by mere mortals who are attempting to end the chronic stress they are experiencing. They are seeking emotional relief by disassociating themselves from their “predicament” and they do so by ending the “pain.” It is ka-put, enough already with the stress, who needs it. Emphasizing the “would I buy it now” approach goes along way to relieve this stress and will help eliminate the sale of a good stock at the very time it should not be sold.