Endowment effect causes investors to overvalue their holdings from "summary" of Beyond Greed and Fear:Understanding Behavioral Finance and the Psychology of Investing by Hersh Shefrin
The endowment effect is a powerful force that influences how investors perceive the value of their investments. When individuals own an asset, they tend to place a higher value on it compared to what they would be willing to pay to acquire the same asset. This cognitive bias causes investors to overvalue their holdings, leading them to make decisions based on subjective rather than objective assessments of worth. The endowment effect is rooted in the psychological concept of ownership, where individuals develop a sense of attachment and familiarity with the things they own. This emotional connection clouds their judgement and skews their perception of value, making them more reluctant to part with their possessions even when presented with better alternatives. As a result, investors may hold onto assets longer than they should, missing out on opportunities to optimize their portfolios and maximize returns. The impact of the endowment effect on investment decisions can ...
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