Ownership Impact

I have been amazed by the impact that ownership has on my thinking. Often I place a price on a security and am unwilling to pay more than this price. Yet, if I have the opportunity to purchase the security at my price and it rises in value on the following day, I am unwilling to sell it. This spread between my willingness to purchase and my willingness to sell is my Ownership Impact.

This Ownership Impact is the basis for a framework to "buy low and sell high." In essence, I am willing to be forced to become an owner if the price is lower than a specified amount and am forced to leave my ownership if the price is above a specified amount. However, this Ownership Impact is somewhat irrational in that if I buy something for $10 and am only willing to sell for $20, why wouldn't $11 be appropriate for new money added? After all, everything I own, am I not essentially repurchasing everyday (assuming frictional costs are negligible).

I discovered a recent article that discussed how deeply hard-wired these behaviors might be. Some researchers at Johns Hopkins focused on how our preferences for something deepen because we chose them. They brought 10- to 20-month-old babies into a lab and gave them a choice of objects to play with - two equally bright and colorful soft blocks. They set each block far apart, so the babies had to crawl to one or the other.

After the baby chose one of the toys, the researchers took it away and came back with a new option. The baby could then pick from the toy he or she didn't play with the first time, or a brand new toy. The baby reliably chose to play with the new object rather than the one they had previously not chosen, as if saying, "Hmm, I didn't choose that object last time, I guess I didn't like it very much." That is the core phenomenon.

It appears that this dynamic is working in reverse to drive my Ownership Impact - that once I have chosen something it is endowed with value. Conversely, once I have not chosen something, I develop an aversion to it. Such lurking biases are important to identify and overcome if good choices are to result.