Super Gann Trader Academy, which conducts stock market courses in Delhi, offers free trader awareness lessons.
In “Thinking Fast and Slow”, Daniel Kahnman gives an example of a Professor who is a willing to pay a maximum of $35 to purchase a vintage wine bottle. However, he is not willing to sell the same bottle for less than $100 once he has acquired this wine bottle. This is very commonly observed in our behavior.
When we decide to sell our car or house hold furniture, we demand a price that is much higher than the price we would be willing to pay for the same item if we did not own it.
This is called endowment effect. This causes plenty of losses to investors. They expect to get much higher price for their investments. If the market prices are trending down these investors will even willingly hold on to the losing asset while waiting for their desirable price. They value what they own differently (much higher) than what they do not own.
This endowment effect comes from our loss aversion. Humans hate losing money. This kind of systematic thinking error causes us plenty of losses over our life time.
An individual does not sell his car/bike (once he has acquired a new one) because he is not getting his intended price. However, he is losing money on his car or bike due to depreciation and maintenance. The same is true for our household items like furniture, laptop, mobile etc.
Thinking like a trader: A trader keeps goods as a proxy for money. He does not feel any endowment effect. Consider the owner of a furniture store, he keeps all the stored items as a proxy for money. He will even sell some goods at a discount (or loss), if those items are not getting sold easily, to make space for ones that are in demand. This is trader mentality. A trader will not hesitate to demand a very high price if the items are in demand.
This type of thinking and behavior is needed in markets too. When company A shares are not in demand, we need to be able to sell it a discount that is in loss to be able to use the same funds for better investment. However, we regularly see investors holding on and wait for shares to reach back to their purchase price to avoid booking losses.
There are many software companies including a good company like Wipro which have not reached their highs of year 2000 even after 16 years. The same is the fate of majority of investors in real estate companies (including DLF and Unitech) that have lost money even after 8 years since 2008.
How can we avoid such errors?
Investors need to think in terms of a stoploss point before they get into any trade or investment. This can be a simple point like 20-25% reduction from recent high. At this point they need to get out of the under performing asset and invest in other ideas. This will prevent them from getting stuck in companies that under perform over long periods or go bankrupt.
Our experts in share market classes in Chennai providing training to avoid these kind of errors to make you as a perfect trader.
We train the traders/investors to trade on the basis of trading systems. We train them to become independent. Trading on the basis of a system is a method of compounding your savings to generate wealth.