In this section 7, we will discuss a type of psychology that causes people to overestimate the assets they own compared to their actual value or the value they would be willing to pay if they did not own them. This is a form of cognitive bias; in psychological development, they will feel more loss than joy, even though the values gained and lost are equivalent. The characteristic of this effect is based on the ownership of the asset. And the name of this effect is "Endowment Effect".
Small example: Mr. T invested in a coin A for $100, and he believed in the potential of this coin A. After a while, the coin's price dropped to $74 due to the declining market, and some analysts said it would continue to drop. At the same time, Mr. T’s friend has a good project being invested by a top company that wants to invite Mr. T to invest and advises him to sell that coin to reinvest, but Mr. T decides not to sell because he feels this coin still holds much value and wants to keep it.
A bit of internal psychological analysis:
- Feels that the value of that coin is much greater than its current value because of owning it.
- Ownership makes Mr. T feel complacent believing it will increase in value and exceed the original price for profit despite having no basis or evidence.
--> missing good investment opportunities, continuing to bear risks.
Reading this far, if anyone has read my previous article on "Sunk Cost" and "Overattachment", you may have some "similar" questions, "What’s the difference?" so let me compare a bit.
* Definition:
- Sunk cost: Continuing to invest in an ineffective project due to prior expenses.
- Overattachment: Overvaluing one's assets due to the time and effort invested.
- Ownership: Overvaluing assets due to one's ownership rights.
* Main influencing factors:
- Sunk cost: Costs that have been incurred and cannot be recovered.
- Overattachment: The time and effort invested cannot be recovered.
- Ownership: Ownership creates a feeling of increased value of the owned item.
* Causes of psychological effects:
- Sunk cost: The feeling of regret, deceiving oneself that one will recover all the costs incurred.
- Overattachment: The feeling of regret for the effort and time invested in it, feeling that the value expended is worth more.
- Ownership: Loss aversion bias, fear of loss, evaluating the pain of loss much greater than the joy of profit.
* Activities:
- Sunk cost: Focusing on recovering lost costs instead of seeking better new opportunities.
- Overattachment: Increasing the perceived value of assets due to personal contributions.
- Ownership: Ownership creates a feeling that the value of the asset is increasing and will continue to increase.
---> Basically, if you don't read carefully, it will be hard to compare and understand the differences because a special point is that these three types of psychology often occur simultaneously, 2 to 3 types at the same time, and not just these types, but many other psychological types as well. If only one type of psychology comes to you, managing emotions is quite easy. Therefore, have certain understandings about psychology.
Through the comparison above, I’m sure you have a basic understanding of this psychological effect, so let's move on to the solutions; anyone with questions can comment for interaction.
---> Solutions:
- Have an objective mindset to evaluate the market as well as reassess the actual value of the assets one owns.
- Set clear goals in investment, establish profit-taking and stop-loss levels in advance to avoid psychological factors affecting behavior.
- Seek additional opinions from outside, we may fall into the bandwagon effect but generally, many brains are better than one, yet we must have our own judgment to evaluate objectively.
I have a group for everyone to connect; if anyone needs, you can message me through the contact below!
0️⃣ . 5️⃣ / 8️⃣ - 8️⃣ . 6️⃣ / 2️⃣ \ 4️⃣ . 3️⃣ , 5️⃣ ? 0️⃣
