How Your Brain’s “Break-Even” Bias Creates Mispricings

Summary

In this episode, Larry Swedroe discusses a new study by Jihoon Goh, Suk‑Joon Byun, and Donghoon Kim that uncovers how the “salience effect”—investors’ attraction to stocks with dramatic past moves—interacts with the “break‑even bias,” a tendency to take riskier bets after suffering losses. The researchers found that, for stocks where investors are underwater, high‑salience stocks underperform by about 2% per month due to overvaluation driven by retail investors chasing recovery, while the effect disappears or reverses for stocks with prior gains. The mispricing is amplified by short‑sale constraints and is most pronounced during periods of high sentiment and volatility. The episode offers practical takeaways: recognize loss‑driven bias, avoid chasing volatile stocks when trying to break even, and consider portfolio‑wide mental accounting rather than isolated position thinking.