There’s an old, tattered shirt in my wardrobe. It has five holes in it. The fabric is thinning, and its white colour has turned into cream. My wife has threatened to throw it away multiple times. But I refuse to let it go. To me, it isn’t just a shirt—it’s the shirt that I wore the first time I picked up my daughter in 2004, on the first day of my first international trip in 2008, and also on my last day at job and the first when I felt really free, in 2011. The shirt has somehow survived years of wear and tear. Rationally, it should be in a dustbin. Emotionally, it’s priceless.

If you empathise with me because you also own one such shirt, or a pen, a bag, or something that you don’t want to part ways with despite it now being in tatters, but just because it was there on your big days, then you are not alone! But know that, like I do, you suffer from Endowment Bias or Endowment Effect.

What’s the Endowment Effect?

The ‘Endowment Effect’ was first coined by economist Richard Thaler in 1980. It describes the phenomenon where people ascribe more value to things merely because they own them.

In one classic experiment by Thaler and Daniel Kahneman, they gave participants mugs and then offered to trade them for an equally priced alternative. Surprisingly, most participants refused to trade, even though the items were objectively of equal value. And when some of them agreed to trade, their required compensation was approximately twice as high as the amount they were willing to pay to acquire the mug.

Why? Because once they owned the mug, they valued it more highly than they would have if they didn’t own it.

In life, this effect often manifests as an irrational attachment to possessions. Think about that old guitar gathering dust in the corner or the stack of books you’ll “someday” read, or the dilapidated bicycle lying in your parking to be ridden one day. We hold onto these things not because they’re useful, but because we’ve imbued them with sentimental value. If you’ve ever done your “Diwali safaai” (cleaning up the home before Diwali), you know what I’m talking about.

Anyways, sentimentality isn’t necessarily a bad thing, because it’s part of what makes us human. But when it comes to decision-making, it can lead to clutter, inefficiency, and missed opportunities. And with respect to investing, it can even be disastrous. Let’s see how.

How Endowment Effect Hurts Investors

If I were to look back at my investment career, I can claim to have a PhD in Endowment Effect. There have been times when I bought a stock at, say, ₹1,000, and then it dropped to ₹700—not because the market dropped, but because the business’s fundamentals weakened.

Sometimes, the company I owned saw intensifying competitive pressures, or the management misallocated capital. Sometimes, my original assessment of the business was too optimistic, but the reality had started to rear its head, leading the stock to decline from my original purchase price.

However, in a lot of such instances, instead of accepting my mistake and reality, and selling and cutting my losses, I held on, convinced that the stock will return to its former glory. I told myself, “It was worth ₹1,000 once. It must certainly be worth that again.”

But, you see, the market doesn’t care what you think. Worse, the market doesn’t even know you own the stock.

Ironically, while we talk about thinking of owning a stock as ownership in an underlying business, the very same ‘ownership’ does something strange to the human mind. We see losses on things we own as personal failures. Selling a stock at a loss feels like admitting we were wrong. But then, investing is not about being right—it’s about making good decisions, even in the face of losses or mistakes.

How to Overcome the Endowment Effect

So, how do we fight the Endowment Effect? As with all cognitive biases that evolution has hard-wired into us, it’s challenging to deal with this bias too, but here are a few action steps you can take to minimise its negative effect on your decision-making:

Ask: If I didn’t own this, would I buy it today? This is such an important thought experiment to conduct on your portfolio. And if the answer is no—that, if I didn’t own this stock, I would not buy it today—it might be time to let go.
Detach from the purchase price. The stock doesn’t know what price you bought it at. The only question is: would you invest in it at today’s value?
Think like an outsider. What advice would you give a friend in your position? Often, we’re wiser when we remove ourselves from the equation.
Set clear exit rules. Have a plan for when to exit an investment before you even enter. Don’t rely on emotions in the heat of the moment.
Seek a devil’s advocate. I may not be willing to listen to my wife, who keeps asking me to throw away my torn shirt. However, I would still advise you to have someone play a devil’s advocate and convince you out of your decision where you think you may be suffering from the Endowment Effect in investing. It works.
The Endowment Effect is sneaky. It whispers, “Hold on. This is yours. It’s special.” But the truth is, nothing is special just because you own it.

A bad stock doesn’t become good because it’s in your portfolio. A house isn’t worth more because you have memories in it. And that old, tattered shirt hanging in your wardrobe? Maybe it really is time to let it go.

Investing—and life—rewards those who can see things clearly, without the haze of attachment. The ability to walk away, to let go, to move on when the situation demands, is what separates the wise from the stubborn.

Now, if you’ll excuse me, I have a shirt to throw away. (Or maybe just wear one last time.)

This article is authored by Vishal Khandelwal of safalniveshak.com, an initiative to teach investors how to make simple and wise investment decisions.