Tuesday, May 15, 2018

Status Quo Bias in investing?

Recently I had done some reflections about my investing journey, which you can find under the Reflections tab on my blog. It prompted me to think about the influence of Status Quo bias in our investing journey.

First of all, what is Status Quo Bias?

From Wikipedia,
Status quo bias is an emotional bias; a preference for the current state of affairs. The current baseline (or status quo) is taken as a reference point, and any change from that baseline is perceived as a loss. Status quo bias should be distinguished from a rational preference for the status quo ante, as when the current state of affairs is objectively superior to the available alternatives, or when imperfect information is a significant problem. A large body of evidence, however, shows that status quo bias frequently affects human decision-making

So how could Status Quo Bias limit or influence your returns?

- Continuing to hold a stock you are vested in when you have an option to cash out and reinvest the returns elsewhere.
- Continuing with a similar strategy you are more familiar with in scenarios when you are certain you can make more money investing into other areas
- Holding onto loss-making investments instead of cutting loss.

Status Quo in my investment journey thus far
I feel I myself am guilty of this to some extent. One example would be demonstrated here, where I had opportunity to sell Capitamall Trust at a high and reinvest but gave it a miss. I felt comfortable holding onto it for continued distribution. 

Having said that, there are moments where it could be a better option to maintain status quo. For example, I continued to hold onto Alliance Minerals when it dropped to a low of 0.21. A part of that has got to do with my entry price, with the remainder being my confidence that the future is bright for the company in spite of the ex-CEO saga for various reasons (bright outlook for Lithium, strong management on Tawana's end, secured dealings with Burwill).

A successful trader with similar outlook as I do towards Alliance Minerals may be able to maximise his gains by exiting on a high and re-entry at the low, but alas I have yet to develop the confidence, competency and consistency to do this, so the next best option in my opinion is to hold. :P

So what's the difference between the two scenario painted above?

That's right, negative and positive practice of status quo respectively, with the positive practice being a more rational decision. 

In closing,
- It's perfectly normal to have status quo bias, but overcoming status quo bias to make better decisions is one way improve your returns in investing and to develop yourself as a successful investor.
- Maintaining the status quo should be validated by solid reasoning. It is, to some extent, also part of a discipline to be more logical and to further isolate emotions in investing.

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