Investing PI 6

Investing PI 6 - "greater tendency to continue an...

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People use mental accounting to categorize money when in essence it is all money and has no different value. Each decision, action, and outcome is filed into a seperate cabinet and once placed in one, it is difficult to change the view points. Often, people will borrow money with a higher interest rate than use their savings with a lower interest rate; had they dipped into their savings they would save money by eliminating the high interest rate while still collecting interest on their savings. The joy (benefits) from consuming goods and services is similar to the joy of a financial gain while costs (pain) are similar to financial losses. There is a high correlation between time period of joy from a good or service and time frame to pay off, a short joy leads to prepayment while long term leads people to accept debt more. People are more willing to prepay for some purchases while getting paid after doing work; this is opposite to traditional economic theories. The sunk-cost effort is an escalation of commitment and has been defined as the
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Unformatted text preview: "greater tendency to continue an endeavor once an investment in money, time, or effort has been made." Size and timing also matter when looking at sunk costs. People will be more likely to take a lower lost that is distanced than a higher more immediate action that results in a sunk cost. Self control also causes people to react differently which will lead them to choose a higher interest rate for a quicker guarentee to pay off something sooner. Also, it is harder for people to save from their income which is seen as "consumption" account compared to their windfall "wealth" account. A tax swap is the selling of a loser to buy a similar stock. To shorten regret, people will tend to sell losers together while selling winners separately to maximize joy. A stock return momentum is when winners keep winning while losers keep losing because the winner is priced under fundamental value while losers are overpriced....
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