All, I sat for L1 2 years ago and there was a term in the studying: someone has lost a lot of money in an investment and puts more money in to bring down the average cost to help them feel better? Anybody remember what that’s called?
Dollar Cost Averaging?
No, there was a different term, sorry…
I think you’re referring to ESCALATION BIAS I’ll never forget this term because it always seemed funny to me since escalation seems to imply UP while the main idea behind the term is that you are averaging DOWN…
Yup Escalation Bias studied in Behavorial Finance section of Equities. The method of calculation the CFAI uses in Quant is called the Harmonic Mean.
Escalation of Committment. It’s like buying a 2001 BMW 540i Sportpackage for $15k. With 100k miles, all of a sudden you need the following repairs: cooling system -> $1,000 Intake reseal -> $1,500 Valve Cover Gasekets -> $600 Bushings and Ball Joints -> $600 You love everything about the car in terms of performance, style, etc. However, you know there is a chance that this car can continue to cost you a great deal of money should you hold on to it. But, you figure that you’ve already put so much money into it and it can only cost you so much… This is called escalation of committment. At some point you must cut your losses and invest in a wiser alternative…