Wait or Act Fast? Best Strategy to Recover an Investment
January 1, 2017
Strategy & General Management
personal finance, disposition effect, behavioral finance, European banking crisis
Journal of Critical Incidents
In 2012, a couple from Cyprus, Andreas and Elena Ioannou, faced the challenge of recovering their investment in the capital securities of Laiki Bank, the second largest bank in Cyprus. They had purchased the securities in 2009–2010, tempted by their high return. They believed the bank securities were safe investments. On May 22, the couple was shocked to receive a tender offer from Laiki Bank for voluntary exchange of their capital securities into either the Bank’s ordinary shares or a new type of capital securities. As it turned out, Laiki Bank was in serious financial trouble. How should they proceed? Should they wait or should they act fast? This critical incident provides an illustration of the irrational reluctance to exit investment at a loss, known as the disposition effect. Students are also challenged to formulate lessons learned by individual investors in the current volatile markets disrupted by the European debt crisis.