People who exhibit endowment bias value an asset more when they own it, as compared to when they don’t. This is inconsistent with standard economic theory, which asserts that a person’s willingness to pay for a good should always equal the person’s willingness to accept disposition of the good.

 

 

In essence, this bias is a mental process in which a differential weight is placed on the value of an object. That value depends on whether one possesses the object and is faced with its loss or whether one does not possess the object and has the potential to gain it.

If one loses an object that is part of one’s endowment (ownership), then the magnitude of this loss is perceived to be greater than the magnitude of the corresponding gain if the object is newly added to one’s endowment.

For example, this bias influences traders to hold onto losing positions because they feel that they “own” the position, and are reluctant to close it and enter a better position instead, although the potential gains are higher. This is often the result of decision paralysis, which places an irrational premium on the compensation price demanded in exchange for the disposal of the endowed asset.

What is the best solution for this?

One way to break free from flawed thinking is to ask yourself, “if you did not have any positions at the moment, would you still choose to take the same position which you are currently holding?” If you answered no, then you might want to reflect on why you are still holding onto it.

“A wise man should have money in his head, but not his heart.”

– Jonathan Swift

Long-term refinancing operations (LTROs) involve the central bank lending money at a very low interest rates to eurozone banks, which has led to the term “free money.”

The injection of this cheap money means that banks can use it to buy higher-yielding assets and make profits, or to lend more money to businesses and consumers – which could help the real economy return to growth as well as potentially yielding returns.

Banks can use assets such as sovereign bonds as collateral for the loans – although they can no longer use Greece’s bonds as collateral after the country was downgraded to a default rating by Standard & Poor’s. This has helped to boost some of the more troubled sovereign bonds, in peripheral countries such as Spain and Italy, as their yields have fallen because they are being used as collateral for the operations.

This can help out the entire country. Spanish and Italian banks, the biggest buyers in the last operation, used their holdings of their own sovereign bonds as collateral for the LTROs. This helped reduce sovereign bond yields, which were threatening to stay at unsustainable levels that would make debt repayments impossible.

In previous auctions, the money usually had to be paid back within three months, six months or 1 year. The ECB’s launch of three-year LTROs in December meant that this time scale was extended, which helped cause a much greater takeup than usual.

– references: CNBC


The question is, what happens after 3 years?

Unless the Euro zone countries can miraculously turn their economies around in 3 years, the problem has just been delayed by 3 years. If the banks choose not to loan out the cash, they can simply use the money to increase their returns via investments, which does not benefit the economy at all. Also, where does the ECB get this cash from? It will need to pay back the cash one day, or risk the devaluation of the Euro, similar to what the US is facing now. The collateral used are the sovereign bonds (which no one wants to buy in the first place), and should the countries decide to default, the ECB will be left with a lot of useless junk on their hands.

Most people have heard of “rose-tinted glasses” and know that those who wear them tend to view the world with undue optimism. Studies have shown that with respect to most positive traits, for example driving ability, good looks, sense of humour, physique, etc, most people tend to rate themselves as above average. Logically speaking, this is not possible.

 

Optimism Bias

 

Traders, too, tend to be overly optimistic about the markets, the economy, the economy, and the potential for positive performance of the investments they make. Many overly optimistic traders believe that bad investments will not happen to them – those only afflict “others”. Such oversights can damage portfolios because people fail to mindfully acknowledge the potential for adverse consequences in the investment decisions they make.

Optimism can cause traders to think that they are getting above-market returns, when in fact they need to take into account things like inflation, commissions, and whether they would be better off simply buying an index fund.

Another danger is when traders read too much into rosy forecasts about the economy or a particular earnings forecast, which could cause them to take larger or more risky positions than they should due to “hope”.

What is the biggest danger of this bias?

There is yet another greater danger. Optimism bias can cause traders to think that they are above-average traders, simply because they are optimistic people in general, or to believe that they are above average in other areas of their life, such as driving ability or social skills, which could further lead to overconfidence bias.

“Comedy is acting out optimism.”

– Robin Williams

This event is the official launch of the CIMB Securities Youth Challenge 2012, a grand culmination of the past few weeks of talks and workshops, which saw many renowned guest speakers sharing their experiences with over 1,700 participants of the challenge.

Synapse Trading, in collaboration with CIMB, also sent their trainers down to provide talks on trading techniques, alongside other speakers from SIAS, SGX, CIMB, etc. For this event, a Synapse Trainer gave an introductory talk on technical analysis, covering trend identification, support & resistance concepts, and price patterns such as the double top and double bottom. Drawing from real-life examples in the Singapore Stock Markets, he demonstrated how these techniques could be applied in real markets.

Guest-of-Honour:
Mr. Andrew Ler (Executive Director of CIMB Securities)
Guest Speakers:
Mr. Wong Jian-Hui (Synapse Trading)
Mr. Geoff Howie (SGX Director)
Mr. Richard Dyason (SIAS General Manager)
Mr. Melvin Tan (CIMB Securities, VP, Head of Youth Engagement)
Networking Speaker:
Mr. Gary Pang (CIMB Securities, AVP)