Two kinds of self-esteem – self-worth and investing confidence – can have opposite effects on an investor’s returns. More specifically, they can affect your tendency to hold onto losing investments. In a 2014 issue of The Journal of Behavioral Finance, researchers Kathryn Kadous, William B. Tayler, Jane M. Thayer, and Donald Young found that two types of investors – those with lower self-worth and those with high investing confidence – both held losing investments longer. They were testing a behavioral tendency called the “disposition effect.”
Effects of Self-Worth
Self-worth, or “self-regard” in the study, refers to how a person views and evaluates themselves. With low self-worth, an individual will be susceptible to external threats to their identity. When threatened, they will take defensive actions to protect their identity, such as denying the threat, dismissing it, or distorting it. People with high self-worth have a higher threshold before taking a defensive action. Their identities are not threatened quite so easily.
When it comes to investing, the prospect of recognizing a loss can be viewed as a threat to one’s identity. “We expect that investors’ tendency to hold losing stocks too long arises from their motivation to maintain a positive self-image in the face of the threat caused by locking in losses,” say the authors (p. 237). This motivation leads some people to take defensive action – to deny, dismiss, or distort the loss. The lower the self-worth, the more the identity threat, and the more delay in recognizing a loss.
The study results supported the hypothesis. Individuals with higher self-worth were willing to take losses sooner. Individuals with lower self-worth held on to losing investments longer.
Effects of Investing Confidence
Confidence in one’s investing abilities is a more specific test than general self-worth. Surprisingly the authors hypothesized that greater, not less, investing confidence would lead to holding losses longer.
With greater investing confidence, more of one’s identity is tied up in investment success. The threat posed by recognizing a losing position, therefore, takes on more importance. More confident investors are then more likely to engage in defensive actions (denying, dismissing, or distorting the loss).
The study results confirmed this. Individuals who expressed higher investing confidence also held losing positions longer.
Self-Worth and Investing Success
It’s well-documented that overconfidence can be one of an investor’s greatest weaknesses, but it can also be difficult to recognize the line between confidence and overconfidence in ourselves.
People with higher self-worth but low investing confidence are more likely to ask for professional help because they aren’t threatened by it. Those with both high self-worth and high investing confidence might do well to occasionally seek a second opinion.
For those with lower self-regard and low investing confidence who have the courage to ask for help, make sure you choose a financial professional who treats you with courtesy and respect. Despite cultural messages to the contrary, your self-worth is independent of your net worth.
Investing success comes from controlling emotions and staying focused, not from being smarter or faster or better with numbers than anyone else.
For more on how emotions affect investing success, see Chapters 6 and 7 of The Mindful Money Mentality: How To Find Balance in Your Financial Future.
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