Joys Of Compounding: The Passionate Pursuit of Lifelong Learning

by Gautam Baid

Framing is an outcome of our aversion to losses. Evolution has programmed our brain to seek loss minimization instead of gain maximization. In investing, narrow framing, a variant of the framing effect, is our inability to zoom out in a given situation. We like winning more than losing, and we keep an internal score for each stock in our portfolio. We maintain a separate mental account for each of our stocks, and we want to close every future sale transaction only with a gain. Instead of looking at overall portfolio performance, we try to gain from every single stock. This narrow framing is known as the disposition effect, and it results in selling winners and holding on to losers. As Peter Lynch puts it, this is the equivalent of “cutting the flowers and watering the weeds.”