Personal Finance Essentials
Endowment Bias
This occurs when you assign more value to something simply because you already own it.
A classic example is when parents die and leave their $1 million house to their children. The kids convert the house into a rental instead of selling it – even though they never would have purchased that house to make it a rental had they inherited $1 million in cash.
Investors often hold investments that represent too much of their net worth – creating concentration risk – or which are underperforming, such as low-interest bank accounts, merely because they have owned these assets for a long time.
When Investments Become Heirlooms
One investor had inherited thousands of shares of stock from her father. She refused to sell them because they felt like an heirloom – the same way she might feel about jewelry passed down through the family. But unlike a piece of jewelry, an investment is a financial tool, not a sentimental object. Its value lies in what it can do for your financial future, not in its personal history. Treating an investment like an heirloom can lead to concentration risk and missed opportunities – and both of those can prove very costly.