You have invested 25 % of its capital in a share, which your analysis predicted growth. Your expectations, but, failed. The price is steadily falling. Do you think: “I have done such a thorough and detailed analysis. I spent a lot of time researching the fundamentals of this company..
I can not belive it, that she falls”. At this moment, you hope, that the position will unfold, and refuse to close it. It's easier to keep an open position, than to admit a wrong decision and take a loss. This is called the flood price effect.: a person increases debt on a losing position just because, what wasted a lot of time, forces and / or money.
The most obvious and explicit example of the effect of the cost of flooding – when we have invested a large percentage of our capital in a losing position and do not want to allow, what have you lost, what have you invested in. but, there are other, more subtle ways of flooding price effect. Most people don't see them, but they can influence investment decisions.
Old adage ” time – The money ” illustrates, that there are other ways, which can “to lose money”, just spending time and effort on investment. For example, You study carefully research a specific company. You read messages about her fundamentals, and monitor the stock price daily, noting price changes, that are consistent with company announcements and significant industry events. The more effort you spend on preparation and analysis, the higher the cost of flooding. There is a strong urge to justify time and effort, which you spent. Otherwise, why spend so much time and effort on this company?, if you do not invest in it? This urge to want to justify your behavior will gnaw at you., and if you do not know this, and don't try to control it, You will be eager to want to invest (long or short) in the action, even when you know, that we should stand aside and wait for another opportunity. Good to know about this subtle effect. Ask yourself – “I want to invest because, that I see a real opportunity, or am I just trying to justify the effort? ” It's important to know, how is it subconscious, but powerful influence can lead you to make a decision, which you will later regret.
It is difficult to overcome this influence. Scrutinize companies well and capitalize on emerging opportunities, just don't overdo it. Remember, spending a lot of effort causes a subconscious impact. Try to get over it. Remind yourself, that you are not required to invest. Your analysis and preparation will surely return a hundredfold someday., in the meantime, learn to wait for the right opportunity.
Know about subconscious and explicit pathways, by which the effect of the price of flooding can influence your behavior. Try to see, does the cost of flooding really affect your decisions. Try to counter it rationally..
