I have written many past musings on the topic of investor behavior. I point out these human idiosyncrasies and how they play out with the hope that some investors will spot within themselves the issues I raise and possibly make wiser decisions going forward.
One of the topics we have not written about before is the topic of "framing" or "anchoring." These are terms psychologists use to describe a decision process in which what we perceive about a situation today is based on a frame of reference or anchor point in the past. This "anchoring" concept often manifests itself with investors who acquired employer stock while working for the company. It could also be inherited stock where the company's shares might even be considered a family heirloom. One way or another, these factors contribute to an emotional attachment that goes beyond the math of ownership.
In and of itself, an emotional attachment to a stock is not a bad thing. This natural bias toward wanting to keep particular shares can have some positive side effects. The most notable positive is that it increases the chance of a tax-free step-up in basis. Current tax rules allow for the forgiveness of accumulated capital gains tax liability at any owner's death. So Grandpa can leave $10 Exxon shares to Junior with his $1 cost and $9 forgiven tax liability. And Junior can repeat that process when Exxon is $79 and he has a $10 cost basis. Clearly a powerful compounder.