Endowment Bias.


Bias अच्छे है , just like दाग अच्छे है।

Endowment Bias

Any time you hear a word bias, invariably your mind deduces it to be some kind of a negative. That in itself must be some bias, maybe I can give it a name and register myself in the psychology hall of fame.

Jokes apart, this association holds true in the majority of humans, only a handful of us understand that biases are in themselves not positive or negative. They are just an outcome of the interaction between your conscious and subconscious mind. (System 1 and System 2 as Daniel Kahneman calls it)

This blog is going to delve deeper into one such bias.

Endowment Bias

I have realized over the years by simply looking at my P&L statement that, not only is this bias “NOT NEGATIVE’ but in fact NECESSARY for you to make money in stock markets.

First the definition, ((for the uninitiated), not everyone is jobless enough to waste time reading books)

Endowment bias refers to peoples’ tendency to ascribe more value to items they own simply because they own them. For instance, people will pay more to retain something they already have than to obtain something that does not belong to them, even when there is no cause for attachment.

In our language, we call it

टेड़ा है पर मेरा है।

Just by the virtue of possession, we value a thing a lot more than what it is actually worth. A lot of marriages are sustained solely on this axiom ;) but I digress

My argument is that Endowment bias is a necessary ingredient that allows you to withstand the vicissitudes of the markets (volatility) and hold on tight.

This is equally true for Momentum investing as it is for Value. While in Value Investing, Endowment is for the individual bottom’s up selected stock whereas in Momentum Investing the endowment is for the ‘strategy’ itself.

Mark my words, without this ingredient, no one can hold on to a winner for long.

Back when I started. I got lucky on a few occasions (almost back 2 back) of spin-off investing, Orient paper became 4x, orient cement became 2x. Majesco doubled, Intellect tripled.

When I look back dispassionately, I realize that the returns had very less to do with the spinoff playing out, but the fact that we were in a Bull Run.

BUT, If it was not for the narrative of SPINOFF Investing, I am sure I would have squared my position a lot earlier.

Of course everyone knows that money is made in bull markets and no matter how good you are, bear markets will take your money!!, nothing new in that.

BUT AHA! moment in this lookback was that ‘We ALL need an anchor to hold on to’. Burning the midnight oil, studying a stock, reading annual reports, going through con calls and transcripts create a sense of belonging, some commitment and consistency if you may and all that creates a commitment to NOW hold on to your chosen stock and ride the whole thing (a full cycle).

Similarly, spending time on your strategy, coding it, debugging it, making it more robust with regime filters create a sense of involvement where you feel one with the strategy which gives you gumption and courage to stick to the plan even when in the middle of a deep drawdown.

All this is made possible by endowment bias. You have developed such an affinity with your stock/strategy that usual volatility will not deter you from Staying On. Holding On.

Of course critics would say that endowment bias has a lot of negatives. You end up getting married to stocks and strategies and hold them to a zero. And I won’t deny that, it does happen.

But here is the Point.

Stock markets in general (in a democratic growing country) usually have an upward-sloping bias and you have to get rich only once. Therefore I would conclude, it is much better to have this bias in your arsenal rather than become a rational academic author.