The endowment effect and recency bias

Two biases that quietly distort how traders value positions and forecast the future.

The endowment effect

The endowment effect is the tendency to value something more highly simply because you own it. In experiments, people demand far more to give up a mug they were just handed than they would have paid to buy it minutes earlier. Ownership inflates perceived value.

The market example: Once a stock is in your portfolio, it stops being just an asset and becomes your stock. You defend it, downplay its flaws, and find it strangely hard to sell even when a clearly better opportunity appears. Inherited shares or a long-held position are the worst offenders — the attachment is emotional, not financial.

Counter: Run a regular "blank-slate" review. Ask of each holding: "If I didn't own this and had the cash, would I buy it today?" If the honest answer is no, the only reason you still hold it is the endowment effect.

Recency bias

Recency bias is the tendency to overweight what just happened and assume it will continue. The most recent data point feels like the trend.

The market example: After three up days, traders extrapolate a rally and buy aggressively. After a sharp drop, they assume the bottom is falling out and refuse to buy at any price. In reality, recent moves say little about the next one, and recency bias is what makes people most bullish at tops and most bearish at bottoms.

Counter: Zoom out. Look at longer timeframes before forming a view, and remember that markets are cyclical — strong periods and weak periods both end. Base expectations on a full history, not the last few candles.