Are You Familiar with the Divestiture Aversion?

In the foreign exchange market, as well as in other financial markets, there’s this term called the Divestiture Aversion. It is said to describe the market behavior of valuing what already exists over what is yet to exist. A common question that it addresses is: “Why put in a lot of resources for a two-ended result?” Basically, it dwells on the concept behind trends; not everyone is willing to chase after an unfamiliar investment, and instead, the majority of market participants prefer something “safe”.   The Divestiture Aversion Explained


  The Divestiture Aversion, as research can detail, points out the typical act of some people to prefer a particular investment; even if it’s apparent that turning the other way is the solution, the insistence of maintaining their original position is there. Since it is a type of emotional bias, it is a behavior that professionals in the forex markets advise their novice fellows to eliminate; it can lead to unprofessional exchanges.   The Divestiture Aversion is also referred to as the Endowment Effect. As one of the definitions of the word reveals, it is about investing with quality; it focuses on how much you are willing to accept (WTA), in comparison to how much you are willing to pay (or WTP). Moreover, it states that it may be impossible to link quality exchanges with a risky investment.   There’s always a First   It was back in the 1960s when the spotlight focused on the Divestiture Aversion; the person who introduced the term was the American economist, Richard H. Thaler. It was stated that the exchanges and the market direction were due to a particular choice; if one looks closely at the reason why an investment is valued repeatedly, it can be discovered that the mindset holds influence on a decision. In the following years, theoretical and empirical studies for further discussions about its concept were started.   Feedback   The Divestiture Aversion is a subject of many criticisms; some economists and forex traders doubt the existence of the market behavior. A few scholars argue that a certain investment choice is unique and if one can be observed, a pattern can be purely coincidental; if it isn’t out of spontaneity, it has no clear basis. Others also state that certain decisions are achieved since they show apparent logic; for instance, if you are given the collections (A + 100) and (A + 70), and you were asked to choose the one with a higher value, it’s only right to choose the former.   Case in Point   A situation that can support the existence of the Divestiture Aversion is the work of Business Administration professor and placebo effects researcher, Ziv Carmon. In his study, he discovered that certain selling prices were chosen; the hypothetical selling prices (WTA) of market participants were significantly higher than their hypothetical buying prices (WTA).   Content Contribution: Mr. Johni has contributed from MTrading Malaysia 

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