FINC 321 Discussion ***Professor Anthony ONLY***

Jason:

What is the meaning of the expressions “don’t count your chickens before they hatch” and “don’t put all your eggs in one basket”? How do these expressions relate to the challenge of reducing exposure to investment risks and building a high-performance investment portfolio?

Don’t Put All Your Eggs in One Basket - This is an expression used to encourage diversification in the portfolio. Many people have overconfidence bias and invest in only one or two securities. This makes their portfolio undiversified and if any of the securities fall the portfolio value would fall down drastically. So person should not be over confident and increase the number of securities in the portfolio.

Don’t Count Your Chickens Before They Hatch - It is an expression used to tell about the unrealistic behavior of individuals. Believing in something which is not real and therefore pinning hopes and enjoying life as such that dream has become a reality.  So until and unless you get out of investment with returns you expect don’t include it in your gains otherwise this emotional bias would make you feel richer and happier. Security prices change daily hence we should be careful to only value gains which are realized.

Tabitha:

The origin of the expression is that not all eggs successfully produce a chicken so you shouldn't count them until all the chickens have hatched. Which means you shouldn't assume something will happen before it actually does.

If all your eggs are in one basket and you drop the basket you could lose all your eggs. Basically, if all your money is in the stock market and the stock market crashes you will go bankrupt.