Park reviews the current holdings in the portfolio with the Chens. He notes that the portfolio contains nearly 20 million HKD of equity in the Golden Flower Trading Company (GFTC). The Chens have had GFTC in their portfolio for several years because they consider it a good company. Park advises them, however, to sell some of the position in order to diversify their portfolio. Chen Wang points out to Park that GFTC has fallen 15% from its high, reached several months ago. “We don’t want to lose money, so please wait to sell until it comes back.”
Chen Wang’s reluctance to sell GFTC until it returns to its earlier high is best described as:
A) regret. B) anchoring. C) myopic loss aversion. The answer is A. Why it is not anchoring since he wants to target the earlier high? Why it is regret? He does not want to experience loss, not do not want to make decision.
Delineation between regret aversion (emotional) and anchoring (cognitive) can be tricky.
Simple rule to identify regret aversion (emotional bias) as follows; hold onto losers and sell winners too quickly (over feelings of having regret later if the position moves up/down).
Regret is the answer because he is afraid to sell only to regret the decision later on (because it might go up). Classical definition.
It could be anchoring but that isn’t the best answer… There is no indication that he isn’t selling because he is anchored on a target price. If the question said “We don’t want to lose money, my target price is X and it almost hit that. We will wait”.