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Worth a read.

Look hard enough and you're likely to see the footprints of regret avoidance all over your portfolio. Still holding on to that Milwaukee Cement stock, telling yourself that you'll hang tough until you get back to even? Hyperrational agent that you are, you're hanging on only because you know that the stock will rebound any day now. But who's to say that you simply haven't been paralyzed by fear of regret, as the behaviorists might claim? To back up their assertions, the profs cited a 1996 study of 10,000 discount-brokerage trades between 1987 and 1993. It confirms that most investors (not just you) hold their losers far too long and sell their winners too soon.

The two-pocket illusion, which behavioral economists prosaically call 'mental accounting,' pops up all over the financial scene. Why else, for example, do companies pay dividends? What rational shareholder wouldn't be happier if the company reinvested the earnings paid out as (taxable) dividends or used them to buy back shares? Either tactic would help lift the share price without triggering taxes. Yet when Con Edison eliminated its dividend in 1974, shareholders at the annual meeting sobbed and shouted for the chairman's ouster, and some had to be driven from the room by security guards.,1640,4244,FF.html


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