On 10.5.2010 I bought a ING Sprinter Long Nokia with a 7 fold levarage with a stop loss at 7.90. The sprinters from ING are simular products as Turbos and Speeders. At the time the Nokia shares were trading at around 8.40. The Sprinters were priced very low, as they had been trading at a price that was more that two times higher a few weeks earlier. My view was that I was getting them at a bargain, but at the same time I failed to fully realize that they were getting closer to the stop loss.
I own shares in Nokia. I bought them at 12.48 but I had observed a cyclical trend in the market price and that they were nearing the previous bottom. In hindsight it seems that I had anchored my expected value of the shares and there was I blind spot in my reasoning (that the market price would go even lower, exceeding the stop loss).
On 21.5.2010 shares in Nokia traded under 7.9 and reached it´s stop loss.
Just the other day, I remembered reading about a bias called “the-end-of-the-day-effect” in an article called Prospect Theory in the Wild by Colin F. Camerer. It has been observed that racetrack bettors tend to shift their bets to riskier prospects as “these bettors really prefer ongshots because a small longshot bet can gererate a large enough profit to cover their earlier losses, enabling them to break even”. What the “the-end-of-the-day-effect” tells us is that people use reference points in decisions that they make under uncertainty which goes against the expected utility theory (that assumes that people make rational choices).
My decision to buy the Long Nokia Sprinters was an attempt to brake even as I was carring losses from my previous investment in Nokia shares.
There are actually two lessons to be learned. (1) I was overconfident in my expectation on market movement and that made me underestimate the chance of alternative outcomes and (2) if I had not been influenced by my desire to break even I could have allocated the capital to more valuable opportunities.