Hope is typically considered to be a positive emotion. But new research provides evidence that hope can have negative financial consequences. The findings, published in the Journal of Behavioral Decision Making, indicate that more hopeful individuals have a greater tendency to hold on to losing stocks.
“I am interested in hope because I found there were too many uncertainties in my daily decisions, and I made some miracles in my path way just because I strongly hope for it,” said study author Siria Xiyueyao Luo, a Ph.D. student at the Marketing Department of the Vrije Universiteit Amsterdam.
“So I initially started being interested in the motivational component of hope. Soon after that, however, I found the negative impact of hope that sometimes being hopeful makes it difficult for people to quit a ‘losing situation,’ such as holding losing stocks. I myself lost quite some money (as a poor Ph.D. student), because I would not let my hope die even the stock seems to be not worth being invested in.”
The researchers recruited 470 U.K. citizens from Prolific, who were presented with a scenario where they had invested £5,000 in Stock X a year ago, buying 1,000 shares at £5 per share. Participants were informed that the price of Stock X had fallen to £1 per share and were asked if they would keep the stock or sell it.
Those who scored higher on measures of hope were more inclined to keep the losing stocks.
In a series of four additional studies, which included 2,489 participants in total, the researchers found that the link between hope and the inclination to keep losing stocks remained significant even after accounting for risk-seeking tendencies, and that the hope to break even (rather than the desire for financial gain) motivated people to keep their losing stocks.
“I was surprised to find that even when people are losing, they still have a strong hope to gain money (so to win) from that stock. The only difference is that, they have a particularly stronger hope to break even, which made them hold on to the losing stocks,” Xiyueyao Luo told PsyPost.
It was also discovered that when people’s hope of breaking even was diminished (e.g. when they were informed there was “hardly any chance for markets to revive in the coming three years”), their tendency to hold onto losing stocks decreased.
Additionally, people who held stocks on behalf of others tended to have lower hope levels of breaking even, and as a result, they were less likely to keep losing stocks compared to individuals who held stocks for themselves. Therefore, holding stocks on behalf of others seemed to reduce the tendency to hold onto losing stocks.
“Interestingly, this hope to ‘break even’ can easily be attenuated/alleviated, if you take a third person perspective,” Xiyueyao Luo said.
But the study, like all research, includes some caveats.
“Our research based on scenarios, so the findings might not be applicable to different life situations,” Xiyueyao Luo noted. In addition, “there are other factors that can drive people to cling onto losing stocks that investors might want to notice. For instance, the investing experience and financial knowledge helps investors to be less influenced by hope.”
“Invest your money depending on the real value (so do some research), but not your hope,” Xiyueyao Luo advised.
The study, “A dark side of hope: Understanding why investors cling onto losing stocks“, was authored by Siria Xiyueyao Luo, Femke van Horen, Kobe Millet, and Marcel Zeelenberg.