An investor who retains a holding in security that loses value until it becomes worthless is referred to informally as a “bag holder.”
Typically, the bag holder will obstinately hang onto their holding for a long time, during which the investment loses all of its worth.
- The term “bag holder” refers to an investor who hangs onto underperforming assets in the vain hope that they would turn around.
- The psychological drivers of bag-holding behavior include investors’ propensity to obsess more about mitigating losses than attaining gains.
- The last owners of a failing investment, bag holders frequently lose money.
Understanding Bag Holders
The word “bag holder” comes from the Great Depression, when individuals on soup lines carried potato sacks containing their sole belongings, according to the website Urban Dictionary.
Since then, the phrase has become commonplace in the investment language. A penny stock investment blogger jokingly made the joke that a support group named “Bag Holders Anonymous” should be established.
An investor who retains a “bag of stock” that has lost value over time is referred to as a “bag holder.” Consider an investor who buys 100 shares of a technological start-up that has just gone public. The share price first increases during the initial public offering (IPO), but it soon starts to decline as soon as analysts start to doubt the viability of the business concept.
The firm is having trouble, as seen by subsequent dismal financial reports, which cause the stock price to further decline. A bag holder is an investor who is steadfastly holding onto the stock despite this troubling series of events.
Loss Aversion and the Disposition Effect
An investor may decide to hang onto underperforming stocks for a variety of reasons. One possibility is that the investor could completely disregard their portfolio and only become aware of a stock’s dropping value.
Because selling a stake would require the investor to admit that they made a bad investment judgment in the first place, holding onto a position is more likely. The disposition effect is another phenomenon that causes investors to prematurely sell shares of a security when its price rises while holding onto assets that lose value.
Investors hold onto the belief that their losing positions would turn around because, to put it simply, they psychologically hate losing more than they love winning.
This phenomenon is related to the prospect hypothesis, which holds that people choose to pursue perceived advantages over perceived costs when making decisions. The fact that people would rather get $50 than $100 and lose half of it serves as an illustration for this hypothesis, even if they would ultimately make $50 in both scenarios.
Another illustration is when people decide against working extra hours because they would have to pay more in taxes. Although they ultimately stand to earn, they are more concerned with the expenses.