Explain the endowment effect and the places where it costs you money.
For anything you keep paying for, put one question to it: if I didn't own this, would I buy it today, at today's price? When the honest answer is no, the main thing keeping you in it is that it already belongs to you.
Hui Min (an example) was in her first job eight years ago when a relationship manager at her bank sold her a unit trust. It now holds S$20,000, and in all that time she has not once compared it with another fund. A colleague recently asked her whether she would buy the same fund today. She answered yes straight away, without thinking it through.
Some time later she looked up the fund's yearly charges, which she had never done before. Nothing she found gave her a reason to choose it over a cheaper fund doing the same job. Suppose her fund has a total charge of 1.5% a year, against 0.3% a year for a comparable index fund (invented example numbers). On her balance of S$20,000, 1.5% comes to S$300 a year and 0.3% comes to S$60 a year. The difference, S$300 - S$60 = S$240, is what she pays extra every year, and it gets bigger as the balance grows. Over the eight years she never asked the question, S$240 a year is what not deciding has cost her (an invented example).
Her fund may be perfectly fine. A fund can be fine and still not be the one you would pick if you were starting from nothing, and the question is a way of finding out which of those two situations you are in.
In 1980 the economist Richard Thaler, who went on to win the 2017 Nobel memorial prize in economics, gave a name to the endowment effect: the tendency to value something more once you own it. Once you have bought an object, you rate it higher than you did the day before you bought it.
The demonstrations most people know involved plain coffee mugs. Researchers gave mugs to some people and not to others, with the two groups otherwise alike. Those with a mug typically wanted noticeably more to sell it than those without one were willing to pay to buy one. The evidence has limits. Later researchers have disagreed about how much of the result comes from the way the experiments are run, and in some versions the effect gets smaller or vanishes, so it is not a law of nature. Away from the lab you can see it easily if you ask anyone selling a used car what it is worth.
The effect sits alongside loss aversion, which you met in lesson 2.2. Giving up something you own registers as a loss, and because losses weigh heavily, you want more before you will part with it.
Mugs are one-off purchases. The cases that cost real money are usually things with a yearly charge: a fund with high fees, a mobile plan you signed up for five years ago, a gym membership, a savings plan your parents set up for you. Because each one feels like yours, replacing it feels like giving something up, even when the replacement is better.
Status quo bias works alongside the endowment effect. It is a preference for leaving things as they are, so that making no change feels like the safe default. When you change something and it turns out badly, you blame yourself; when you leave it alone and it turns out badly, you put it down to bad luck. This bias accounts for the many people who still hold the first fund anyone sold them, still pay for plans that renew automatically, and still keep their savings in the account they opened as students.
The same bias can help you. Since people tend to stay with whatever is already set up, putting the right arrangement in place once does most of the work, and Module 5 covers how to do it. Meanwhile, remember that doing nothing is also a decision with its own costs, which for Hui Min came to S$240 a year.
With funds, shares and subscriptions you can apply the question almost as it stands, since you can usually sell a fund and buy a different one at today's prices for a small cost. Start by picking something you own or pay for regularly, and ask yourself honestly whether, if you didn't own it, you would buy it today at today's price. Then set it against the alternatives, looking for example at charges, holdings and how each one fits your plan. Add up what switching would cost: any sales charge on the new fund, plus any spread or switching fee. Make your decision on that comparison, and give the option you already hold no extra credit for being yours.
Hui Min has now done this. She put her fund next to two alternatives and compared their charges, their holdings and how each fits her plan. She hasn't moved her money yet, because she wants to check the sales charge on the new fund before she does. Her question has also changed: she used to ask "is this still okay", and now she asks "which of these would I choose today".
Insurance policies need their own version of the question, because buying the same policy again at today's price is not possible. You are older than when you first took it out, your health may be different, and with a long-term policy you have already paid costs that were front-loaded. Surrendering an old policy can lose you money even when a new policy looks better, and Insurance Decoded lesson 7.2, "Why replacing a policy usually costs you", explains how that happens.
For a policy, get two answers first. One is what replacing it would cost at your current age and health. The other is what you would lose by surrendering it. Once you have both, ask: knowing what it would cost to replace and what I'd lose by surrendering, is keeping this the best option from here?
The answer may well be to keep the policy. That is a fine result, provided you have actually checked the replacement cost and the surrender loss before reaching it.
Choose one thing you pay for every year, a policy, a fund or a subscription, and put the question to it directly.
Pick one policy, fund or subscription you have. Write down whether you would buy it today at today's price.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).