I moved house about 2 years ago and the worst piece of furniture – I got it made to order – has to be my book shelf. When you have a bookshelf, you fill it with books. Worse thing is there are books which if I read cover to cover..and do NOTHING else in life, I will run out of time, not books.

Long long ago I bought a Shobha De book at Kurla railway station – and left it in the train. I just could not read it beyond 30 odd pages. Other than that I have not ‘thrown’ away any book. That explains a full book shelf.

I no longer do Sales Training workshops – and I must be sitting on 10 books at least on Training itself! I have books which I genuinely do not like, but I have not thrown them away. I have books that I have read a few times and will read it a zillion more times. All of them find a place.

Welcome to Endowment effect.

We start to clean up our room, bookshelf, wardrobe…look at some of our ‘possessions’ fondly, and cannot throw things out. Recently I embarrassed my Mother by refusing to take things from my parental house. I just do not want to accumulate. It is easier not to get it – throwing things away is not possible. THAT IS CALLED ENDOWMENT effect.

If I have shares of Colgate, I will not see the benefit of selling Colgate and say buing PnG. I will require a far greater incentive to give up something – far greater than what I am willing to pay for a similar product. Examples like choosing a seat in an aircraft is a good example.

The inconsistency is revealing. : it’s the tendency for us to overvalue things we own. It explains why we are so unwilling to give something up once we have ownership of it.

How should one beat the endowment effect:

1. If you are an equity investor, ask a debt loving investor to look at your asset allocation.
2. Try to become more detached from people, products, shares, mutual fund schemes
3. An annual review of your portfolio – including your clothes, books, etc. is useful
4. Start giving away – everything including books – a kindle version maybe available anyway
5. Hire things that you need – an Ola or Uber is better than owning a vehicle
6. If you have your grandfather’s coin collection, check if your siblings or progeny want them
7. Cassettes, CDs, VCDs, – honestly these are now junk with YouTube in place.
8. Want to learn to play the guitar? borrow from a friend who has kept it in the attic!
9. Stop buying things which you may or may not use
10. Reduce the size of your wardrobe. Now.

Endowment effect on your portfolio is even worse. Let us say you bought Suzlon at Rs. 22. You thought it was a good share to buy because Mr. Singhvi of Sun Pharma bought it at that price. Then the price fell to Rs. 16. YOU WERE NOT CONVINCED that it is a good buy, but you DID BUY. You called it AVERAGING. Actually it was YOUR inability to accept that your decision to buy it at 22 was wrong. This was the Endowment effect at play.

Then you bought more at 13, then at 11, and then at 8.

You now have say 100,000 Suzlon bought at various prices. Of course you are sitting on a HUGE loss (as a % age of the invested amount) but the ENDOWMENT effect is not allowing you to sell.

What you are losing is an amazing opportunity cost.

What can you do now?

Wait for the next quarterly or half yearly result. Read it properly, check out the guidance. Talk to a Suzlon hater. Not difficult to find them – seek their views. Ask yourself  ‘will this company ever, ever create wealth for me’.

Find the answer. Sell at 8. Or buy at 8. Its your decision. But take the decision AFTER GETTING OUT OF the endowment effect.

PS: this was just an example. I may/may not have Suzlon. This is not a recommendation to buy or sell Suzlon. For all you know I may even have vested interest in the share price going down, or it maybe a personal enmity with Mr Tanti. Use your own brain.

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