People become very attached to wherever they invest their resources, whether they are time or money. It makes sense when you think about it. That attachment permits you to make justifications about why you continue to invest your resources in the same way you always have. And that attachment is a strong emotional connection to your self confidence and identity. “Of course I make good decisions! I’m very smart and rational!” Changing your investment strategy means admitting that you were wrong and maybe you aren’t as smart or rational as you thought.
We all want to believe that we’re smarter than the market. We want to believe that our decisions and our choices are going to work out in the long run. And if we just have the courage of our convictions, we’ll be proven right in the end. But maybe that investment of time and money has all been a mistake. This is basically the economic theory of sunk cost. Of course, its hard to know when to pull the trigger and change course when you’re emotionally invested. Because sticking it out just a little longer might get us the payoff that we’ve been waiting for. (Side note… One night during finals, someone had written on the steps leading to Tydings Hall “All of that studying was a sunk cost. Turn back now.” The economics department wasn’t known for its comedic chops.)
This is why people don’t price their houses properly when its time to sell. This is why people have such a hard time sitting still when their stock portfolio takes a dip and rush to cash. They have become emotionally invested in the value of those investments and don’t want to admit that they might be worth less than they think. This is why managers continue to tolerate underperforming employees. They’ve invested time and energy in trying to improve performance so its difficult to admit they made a bad decision hiring them. And this is why people keep hanging out with toxic friends that only make them feel worse instead of cutting bait and finding better friends. (Maybe this is why people keep rooting for the NY Jets?)
All that said, while people are sentimental and emotionally attached to their investments, the market does not care. The market doesn’t care if you have all your money invested in the oil and gas ETFs. Electric cars are here to stay. It doesn’t matter if you’ve completely renovated your house. If people aren’t interested in moving to your community, your house isn’t worth what you think it is. And with regard to current events, the market doesn’t seem to care if a bunch of people storm the Capital building and riot. The stock market is going to close at an all time high.
When it comes to corporate real estate, this is why we see companies make irrational decisions about their space needs and why landlords hold onto pricing models despite changes in the market environment. I see this play out all the time as an advisor. We walk a delicate balance as we manage egos while also steering our clients towards rational solutions that serve the best interest of our clients. But that’s part of the job… bringing some sanity to an emotional process no matter what the principals would have you believe.