Making Decisions Regarding the Sale of Securities

Many wealth managers have observed that investor decision making regarding both inherited and purchased securities can exhibit endowment bias and leading to “decision paralysis”. Many people have trouble making decisions regarding the sale of securities that they either inherited or purchased themselves, and their predicament is attributable to endowment bias.

List’s (2003) unique and highly relevant paper entitled “Does Market Experience Eliminate Market Anomalies?” reviews some key aspects of endowment bias, the lessons of which can be relevant to invest. He ascertains the effect of trading expertise on an individual’s susceptibility to endowment bias. This sample population traded sports cards and other sports memorabilia, and the key result of his empirical analysis says that traders with more real-world experience were less susceptible to endowment bias. Most professional sports memorabilia dealers, for example, show little biased behavior. List also demonstrates that people who are net sellers learn how to trade better and more quickly, with less biased behavior, than people who are net buyers. These lessons have direct implications for securities markets, and readers should take note: Neoclassical models include several fundamental assumptions. While most of the main tenets appear to be reasonably met, the basic independence assumption, which is used in most theoretical and applied economic models to assess the operation of markets, has been directly refuted in several experimental settings.

These experimental findings have been robust across unfamiliar goods, such as irradiated sandwiches, and common goods, such as chocolate bars, with most authors noting a behavior consistent with an endowment effect. Such findings ha...

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...itive biases stem from faulty reasoning, better information and advice can often correct them. Conversely, because emotional biases originate from impulse or intuition rather than conscious calculations, they are difficult to rectify. The current study tries to understand endowment bias and its implications for investors and also makes an effort to find empirical evidence whether Indian individual equity investors exhibit Endowment bias while making investment decisions.

The following table 1 summarizes the two hypotheses tested related to endowment bias. Single proportion Z-test was used to test the hypothesis. The table presents the percentage of investors who exhibited the bias. The following table presents the calculated value Z value and the decision of accepting the null or alternate hypothesis along with confidence level at 5 percent level of significance.