Investing in the stock market consists of buying shares to obtain a profit from it through their revaluation or dividends. To be a good investor, we must be focused on buying low and selling high, being objective in both processes. Post-purchase rationalization can limit our objectivity in valuing the stocks we have in our portfolio, influencing us negatively in our sales processes. In this article we will see the definition, examples and ways to avoid this cognitive bias.
What is post-purchase rationalization?
Post-purchase rationalization, also known as Stockholm buyer syndrome, is a cognitive bias that consists of a positive bias of a product or service once it has been purchased. This positive bias is usually accompanied by giving a sense of rationality to something that initially lacks it.
This cognitive prejudice, to the contract that others that we have analyzed in the Investment Academy, is not usually very harmful to people. What's more, post-purchase streamlining can be beneficial to us in many cases. For example, in cases where the decision to buy a house is made among the available supply, post-purchase rationalization makes us convince ourselves that our decision has been the most appropriate, since it is useless to keep thinking about one decision that has no turning back.
However, post-purchase rationalization can be very dangerous when investing in the stock market. This is because it can make us attached to stocks and limit our objectivity to sell in the event that stocks are overvalued.
Examples of post-purchase rationalization
Let's suppose that a listed company objectively has a business of the lot, with certain competitive advantages and some problems that it is not clear that it will be able to overcome. The post-purchase rationalization will make that once the share is bought we give a greater weight to the positive facts than to the negative ones when evaluating the action.
Post-purchase rationalization also occurs in other types of products, such as a car, a house, a mobile phone or a pet that after purchase are valued in a different way than before.
How to avoid falling into post-purchase rationalization?
Again, as with other cognitive biases, the best way to avoid falling into post-purchase rationalization is to use the same objective methods to value a product before or after its purchase.
For this reason, it is essential to use objective data or ratios to assess the actions in which you are going to invest and in which you have invested, and not based solely on subjective perceptions that can be misleading and be influenced by post-purchase rationalization .