While it might sound strange, "get-evenitis" is an actual condition suffered by almost every investor at some time. While the term is unusual, significant research has gone into understanding why investors suffer from this behaviour.
So what is get-evenitis?
Get-evenitis is the tendency for investors to hold onto losing investments until they can be sold at the price they were originally bought at.
An example of get-evenitis could be an investor who bought BHP Billiton Limited (ASX: BHP) for $45 at the peak of the commodity price cycle, and is holding on in the hope of seeing that price again with little thought to the actual value of the business today.
In such a circumstance the logical approach would have been to reassess the value of BHP much earlier and sell if there was a better use for the capital. Unfortunately many investors suffer from get-evenitis telling themselves it's only a paper loss and they will sell when they can get their original investment back.
Why does this happen?
Researchers Amos Tversky and Daniel Kahneman were the first to show that humans experienced twice as much pain from a loss compared to the pleasure of a similar sized gain. They named this behavior "loss aversion".
In layman's terms this occurs because realising a loss is painful and something we prefer to avoid, while on the other hand we feel pleasure and clever when selling an investment at a profit, so this makes it an easy thing to do.
As a result, investors tend to hold onto losers too long and sell winners too soon.
This seemly irrational behavior is known as the disposition effect. As an example you might like to ask yourself how many times you have heard a fellow investor say it is only a paper loss. Then ask yourself if you have ever heard anyone refer to a profit as only a paper gain?
Foolish takeaway
It is never easy to accept and admit your own mistakes.
As investors we need to step back from the emotional aspects and rely solely on our research. As we enter into investment decisions based on valuing a company we need to do the same with our exits. I have made the mistake of hoping an investment would turn around rather than relying on the facts. I also know my returns have improved considerably by accepting my mistakes and moving my capital into growing investments.
