Investment Commentary

To Affinity, and Beyond!

By Brian Haendiges

Once you’ve got hold of something, it’s hard to let it go. In the world of investing, this behavior can lead to mistakes as simple as hanging onto that dog of a stock, or as broad as staying cemented to a particular viewpoint (“Rates will go up soon, for sure.”)

A close friend and former colleague, after two heart attacks and more than 40 years on the job, still felt compelled to work.  She didn’t want to liquidate the assets that she’d need for retirement income.

This phenomenon, valuing what we own more than what we don’t, is called the “endowment effect.” Psychologists have documented it with a fascinating array of experiments in which people have shown reluctance to part with items ranging from coffee mugs and pencils to sports tickets and souvenirs; (check out Predictably Irrational by Dan Ariely or Thinking, Fast and Slow by Daniel Kahneman for more).

Being chained to our possessions is deeply emotional and may have its roots in a competitive past in which animal ancestors fought over food. If you don’t hold onto what you’ve got, you don’t eat.

Even our support of sports teams can be tied to the same predilection. We develop “ownership” of a group of players independent of their quality of play, despite Jerry Seinfeld’s observation that we merely “root for clothes.”

I can’t drive from my head a photo taken outside the stadium of this year’s North London Derby, a perennial football match (“soccer game” for us Yanks) between arch rivals Arsenal and Tottenham. A supporter stands in front of a police barricade, bloodied but unbowed, after a fight with the other side. There’s a reason that the word, “fan” is short for “fanatic.”

There is a solution to this “tyranny of ownership.” When starting a new initiative or making an investment, establish your parameters for exit in advance. During our due diligence of investment managers for example, we look closely at a manager’s ability to maintain discipline under duress. It’s a sign of unbiased, unemotional decision making.

A common negotiator’s rule of thumb in the same vein is to know your bottom line before you go into a negotiation. Defining limits up front can help.

Another option is to spend time with a third party who isn’t so wed to the emotional aspects of ownership as you are. Just talking things through with someone else can help you be more detached and objective.

One additional alternative is to recast your decision as tied to a higher purpose. These same fans of Arsenal (go Gooners!) and Tottenham cheered as one when England scored against Germany, regardless of who struck the ball into the net.

In the case of my friend, a colleague and I successfully talked her into liquidating securities by repeatedly emphasizing a simple concept. “You’re not giving up those assets. You’re trading up for something else.”

That simple shift in her mindset was all it took for her to begin enjoying a happy retirement. I’m so glad she did. Only a few years later, she passed away and might have entirely missed the opportunity to spend more time with family and friends if she hadn’t let go of one thing to grab onto another.

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