Are You Suffering From Get-Evenitis?
June 29, 2009 by Tisa Silver
Filed under Finance
Have you ever invested in something and watched the value of your investment wither away?
If so, why didn’t you sell? Perhaps you suffered, or are suffering from a case of “get-evenitis.”
“Get-evenitis” is the layman’s term for loss aversion.
Photo by Triin Q, courtesy of flickr
Loss aversion is a reluctance to sell investments after they have decreased in value. It may also be referred to as the breakeven effect.
Research shows that many individuals suffer from loss aversion. Individual investors are approximately 1.5 times* more likely to sell a stock that has risen as opposed to selling a stock that has fallen.
For example, suppose you bought 100 shares of Citigroup (Ticker: C) in June 2007 for $47.31 each. One year later, shares were trading at $16.23 per share.
Would you sell the shares? If not, why? The decision to sell should not depend on the price you paid for the stock. It should depend on things like your research regarding the current value of the stock and expectations for its future cash flows.
If you held on to those shares last June, today they would be worth $3.02 each, representing a 93.6 percent loss on your investment.
As Kenny Rogers said, “You have to know when to hold ‘em, know when to fold ‘em.” Elsewise, the aversion to selling at a loss today can cause you to sell at a greater loss, later.
* = from Fundamentals of Investments, Jordan and Miller, 4th Ed.
