Figuring out what you believe to be the intrinsic value of a stock is one of the most significant things you can do. If you bought shares of Sprint Nextel
How you define the floor
When investors try to determine a sales price, it seems as though we all too often let our emotions get the best of us. To illustrate this point, consider an experiment documented by behavioral economist and professor Dan Ariely.
Duke students are fanatical about their basketball program, and they illustrate their passion when it comes to buying tickets. There is a strict procedure where students have to camp out intermittently for an entire semester, responding to arbitrary bull horns and missing classes and exams. These are die-hard fans. For big games, students at the front of the line aren't even guaranteed a ticket -- only a spot in a lottery system. A list is posted later with the winners of the lottery, and often those who have sacrificed the most find themselves without a ticket to the game.
Duke professors wanted to conduct an experiment, so they found students who received lottery tickets and those who did not, and tried to find an equilibrium price where a ticket could be bought and sold. Remember -- both sets of students missed classes, spent evenings in tents, and went through the same rigorous process to obtain these cherished tickets. When the lottery losers were asked how much they would pay for a ticket, the average price was $175. The lottery recipients, on the other hand, would not sell their tickets for anything less than an average of $2,400! How could there be such a price discrepancy when both sets of students were willing to go through the same ordeal?
We all love what we have ...
The reason is that the lottery winners were victims of ownership bias; that is, they overvalued what they owned, simply because they owned it!
This helps explain why people may have held on to shares of Cisco Systems
When investors make a purchase, what Ariely calls an emotional chasm is formed between the "old you" who didn't own the stock and the "new you" who now owns some very precious shares. In the case of Duke basketball, it was an "empirical chasm as well -- the average selling price (about $2,400) was separated by a factor of about 14 from the average buyer's offer (about $175)," Ariely wrote in his book Predictably Irrational.
I fall prey to this bias every time I buy a stock. In August of last year, I purchased shares of General Electric
And we never want to let it go ...
Say you were bullish on the solar industry and owned shares of First Solar
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Jordan DiPietro owns shares of General Electric and First Solar. Sprint Nextel is an Inside Value pick. First Solar and Suntech Power Holdings are Rule Breakers selections. The Fool has a disclosure policy.