Tuesday, May 25, 2010

The perils of emotional overinvestment

Emotional overinvestment is a state where one leans towards doing irrational things under the weight of the time and effort invested in supporting that same irrational act.

EI is most commonly seen in negotiations, where one party relents due to mental weariness. It becomes too difficult for the person to comprehend a no-result after having invested so much of time and effort. In the process he takes decisions which are detrimental to the company. I recently saw one where the buyer quoted 50 rupees and the seller quoted 150 rupees for a shawl. After 5 minutes, the buyer relented to 80 rupees while the seller was stuck on 150 rupees. Then 110-150 and then 130-150 .. and finally the deal closed on 150 rupees. The buyer had overinvested over 30 minutes of his time to come out the deal drawing a blank.

The same behavior is seen in auctions where bidders, inspite of having a maximum price for themselves, keep up with the increments. They too feel the the sapping effects of EI.

Investing is no different. As a student of value investing, I too have been a victim of it. Researching every stock, however good or bad, takes time and effort. To make matters worse, it also has an element of opportunity cost attached to it. In a bid to find that one hidden gem, I run the danger of picking a weak stock just because of the 'emotional investment' I put into the research of it.

Today, as the market touches 16,000 points on the BSE, we might see some value buys. Every value investor must be vary of the perils of emotional overinvestment as they runs their numbers in annual reports, moneycontrol and tomes of articles on the Internet. Its easy to make a mistake, almost impossible to rectify it.

In conclusion, I am reminded of a line in the movie "Syriana" where one of the attorney says - "When they write the GAAP like abstract art ... you look at a liability long enough and it'll start looking like an asset".

Good luck.


saurabh said...

Hi Shankar,

Great to have a post from you after such a long time.

Hope you will keep posting regularly from now on....

Best Regards,

Shankar Nath said...

Hi Saurabh,

Yes, its been a while. I'll try to have 4-5 posts each week.

Keep adding your comments to the latest posts - that way we can learn & identify more value buys.