The endowment effect is the tendency to overvalue anything simply because you own it.
Effect:
• Resistance to sell a portfolio of losing stocks due to emotional attachment.
• Not being objective when reassessing holdings.
Illustration
A shareholder continues to hold on to a company's stock for many years even as its prospects dwindle down due to their belief in the company.
How to Reduce It
• Review your portfolio frequently and re-assess investments without attachment to the fact that you own it.
• Consider future growth rather than past ownership.
9. Availability Bias
Availability bias is when decisions are based on available information instead of a well-rounded view.
Impact:
• Rare events are more likely overestimated, such as market crashes or times when the market experienced a crash.
• Less visible, but critical, risks or opportunities were not focused upon.
Example:
One investor stays away from equities all together after hearing some news about a market crash although the record of long-term growth is present.
How to Mitigate:
• Decisions should be based on balanced risks and opportunities.
• Avoid sensational news and anecdotal evidence.