"I can be just as dumb as anybody else."
-- Peter Lynch, September 2008

Peter Lynch earned near-30% annual returns running Fidelity Magellan from 1977 to 1990. He's sold millions of books, raised millions for charity, and holds the rare distinction of having a Motley Fool Global HQ conference room named after him.

But in September 2008, Peter Lynch also had the ignominious honor of holding both AIG and Fannie Mae in his personal portfolio -- as they dropped 82% and 76%, respectively, during that month alone.

Ouch.

For those of us who have spent our investing careers trying to match the great Peter Lynch … well, if you lost 80% in September, then congratulations -- you did it! If you did better than negative 80%, then you beat the great Peter Lynch.

Invest like Peter Lynch
We kid, of course, and we're in no way demeaning Lynch or his illustrious career. We're just pointing out how hard it's been to avoid a flameout lately. Indeed, the once-revered Bill Miller's Legg Mason Value Trust lost more than 55% last year, when big holdings Sears Holdings (Nasdaq: SHLD), Electronic Arts (Nasdaq: ERTS), and Aetna (NYSE: AET) were hit hard. Hey, when the blue-chip S&P 500 has dropped some 40% over the course of a year, you know it's bad.

In other words, even if you don't own AIG or Fannie, you probably own a stock like AIG or Fannie. We sure do. Heck, we've both ridden the Vanguard Emerging Markets Stock (NYSE: VWO) ETF from $25 to $55, and all the way back down to $25 again. And that’s a collection of 716 stocks that includes stalwarts such as China Mobile (NYSE: CHL) and Teva Pharmaceutical (Nasdaq: TEVA).

We are not alone
And while there are many stocks that will recover from this market downturn, it's likely we're all continuing to hold stocks that won't. New research, from Profs. Nicholas Barberis and Wei Xiong of Yale and Princeton Universities, gives a name for this tendency: We're exhibiting "realization utility."

Realization utility encourages investors to hang on to stocks that have sunk -- even when those stocks have dim futures. Here's how the professors explain it:

The authors consider an additional experimental condition in which the experimenter liquidates subjects' holdings and then tells them that they are free to reinvest the proceeds in any way they like. If subjects were holding on to their losing stocks because they thought that these stocks would rebound, we would expect them to re-establish their positions in these losing stocks. In fact, subjects do not re-establish these positions.

That's right. If we force-sold all of your stocks and gave you the cash to reinvest, would you buy the stocks we had just sold? Odds are, you wouldn't.

So why would you hold on to stocks that you don't think will recover? We'll let the good professors give it to you straight: "Subjects were refusing to sell their losers simply because it would have been painful to do so … subjects were relieved when the experimenter intervened and did it for them." Continued...