[Summary]
The endowment effect is the psychology of overestimating what you have.
What is most likely to lead to failure due to the endowment effect is not the lack of knowledge itself, but the situation in which a hasty decision is later justified.
In actual investment, the first step is to think about whether you can buy new stocks you already own. However, we cannot overlook the fact that it is easy to become attached to the stocks you should sell.
In this article, we will organize the ownership effect not as "knowledge" but as a procedure to check before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
First, divide by endowment effect.
When looking at the endowment effect, first determine what you want to judge. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. The endowment effect alone is not a factor in determining decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Situations where it is easy to fail due to the endowment effect
If we look at the endowment effect as a failure pattern, we first need to make narrow assumptions. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
Checking the following points will make things a lot easier.
| Axis to check | Looking at the endowment effect |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
The endowment effect can stumble not only when you lack knowledge. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Do not decide whether to buy or sell the moment you see the ownership effect.
- Do not mix the time axis that suits the holding effect with your own holding period.
- Don't increase your position to recoup your losses
- Don't make a decision just based on SNS or rankings.
The important thing here is not to rely solely on the endowment effect as the correct answer. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using the endowment effect as a basis for making an actual decision, check at least these five things.
- Can you explain in one sentence the purpose of looking at the endowment effect?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of checking the endowment effect is not to act faster, but to reduce unnecessary judgment errors.
Summary
The endowment effect is a material for organizing investment decisions. Even if you read it as a failure pattern, treating it as a standalone buy/sell signal will lead to poor judgment.
The points to keep in mind are as follows.
- Decide first the purpose of looking at the endowment effect
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. It is realistic to treat the endowment effect as a tool to pause before buying or selling, rather than a word that forces you to make a hasty decision.