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RBS Share Sales, Public Bailouts, and the Sunk Cost Fallacy

Article Quant Q&A · Author: rrg
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Summary

The document asks why the UK government would sell shares in RBS at a loss relative to its purchase price during the financial crisis. One response explains that the state’s intervention was intended to rescue the bank, rather than to make a profit from owning it. Another frames the decision as a current risk-and-value choice: continuing to hold shares exposes the owner to possible further declines as well as gains.

The discussion warns against treating the historic purchase price as a reason to keep holding an asset. It describes this as the sunk cost fallacy and argues that a decision should be based on the asset’s current prospects rather than the amount previously paid. The answers offer a concise economic rationale, not a detailed analysis of the government’s sale timing, valuation, or alternative uses of the funds. They also do not establish whether the market price was in fact fair value.

Key ideas

  • The government’s RBS investment is described as a financial crisis rescue rather than a profit-seeking trade.
  • Holding the shares carries ongoing risk because their value can rise or fall.
  • A past purchase price alone does not determine whether holding or selling is rational now.
  • The replies do not provide a detailed valuation or analysis of the timing of the sale.

Tags

EquitiesRisk managementStatistics
Full text
# Why does the UK government sell RBS shares?


# Why does the UK government sell RBS shares?












What economic rationality is behind this transaction: They purchase at c.500p in fall 2008 and spring 2009. There has been no dividend. The likelihood for dividend appears to be when economy improves, or rates normalise and financial markets recover; investment banking profits will rebound in addition to the lending margin.

Why does the UK government sell RBS shares at a loss?

## Answer by dm63 (score 4)

https://quant.stackexchange.com/a/40753

The U.K. Government is not in the business of owning banks. The investment was never supposed to make money - it was to rescue RBS during the financial crisis.

## Answer by Phil H (score 1)

https://quant.stackexchange.com/a/40755

Holding any asset infers some risk regarding the value of that asset. The market's estimation of the value of that asset includes its expectation of the asset increasing or decreasing in value, and arbitrage pricing enforces the current price based on those expectations.

In other words, waiting for the price to go up would be a gamble. The price could also go down. The current price is probably the current fair value, so deciding your current strategy on the basis of a historic price (500p) is foolish; it is known as the sunk cost fallacy.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.