Escalation Bias

In behavioral finance, escalation bias causes investors to invest more in money-losing investments for which they feel responsible than they invest in an ongoing successful investment. The popular concept of “averaging down” to reduce the average price paid for the investment may be representative of this bias.

The rational, traditional finance model would expect investors to re-evaluate holdings for potential bad news that they had failed to incorporate into their initial valuation. If the re-evaluation supports the investment, then more could be added. Otherwise, it would be wiser to exit the position and take the loss.

For more information, see all articles on: Behavioral Finance

See also:
  • Hedge Fund Databases: Sample Selection Bias
  • Overconfidence and Confirmation Bias
  • Data Measurement Errors and Biases
  • Self-attribution Bias and the Psychological Call Option
  • Biases in Detecting Efficient Market Anomalies
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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