Are you holding on to losers??

Jason Zweig, a very savvy commentator on financial matters, recently wrote in a WSJ column about what prompts people to hold on to their losers in investments. He cites research in a new field called ‘neuroeconomics’ which offer some clues. One such study involved people deciding whether to hold or sell investments while being monitored inside a brain scanner. While monitoring the ventral striatum (part of the brain associated with associated with emotional and motivational aspects of behavior), it was noted that when an asset was a loser and the price was made to go up, activity in this part of the brain was ‘blunted’ meaning that people were always hoping for a rise and therefore they were not surprised. They concluded that most investors who have losers are always hoping for a rise in the value of their holdings. Another study showed that people are much worse at estimating losses from a bad investment than gains from a good investment. 
Comment: My take is that a lot of us hate to admit we made a mistake and think we are really smart at spotting good investments. When we do, it is the equivalent of ‘out of sight, out of mind’ and we ignore the problem hoping it will correct itself. This is normal human behavior!