Stocktake: My stocks won’t fall, I chose them

I picked that stock, so it won't go down. That's how Liberum strategist and blogger Joachim Klement characterises a recent study investigating investors' motivated beliefs.

In an experiment, researchers asked participants to observe the movements of artificial stocks. After a period, participants were asked to estimate the future returns for the stocks. They were then either given three random stocks or allowed to choose three stocks to hold.

When randomly assigned three stocks, investors’ future estimates remained unchanged. However, their expectations increased when they chose three stocks.

“Just because they actively picked those stocks,” notes Klement, “they thought they had to have a higher return, even though they did not think so before they chose these stocks.”

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The same pattern played out in a second experiment involving glamour stocks like Tesla and Netflix – that is, investors' expectations increased after they buying a stock.

Importantly, this tendency was strongest among sophisticated participants, suggesting motivated reasoning is a problem even among experienced investors.

When we own something, it distorts our perceptions – and that’s something investors need to be aware of. “Chances are if we picked the stocks ourselves,” says Klement, “we tend to substantially underestimate their risks.”