The tendency to find losses twice as painful as we find gains pleasurable.“People hate losses (and their Automatic Systems can get pretty emotional about them). Roughly speaking, losing something makes you twice as miserable as gaining the same thing makes you happy....Consequently loss aversion produces inertia, meaning a strong desire to stick with your current holdings,” says Richard Thaler, author of Nudge: Improving Decisions About Health, Wealth and Happiness. Loss-aversion was first convincingly demonstrated by Amos Tversky and Daniel Kahneman. Tune into a fascinating Kahneman lecture here.
LOSS-AVERSION & MONEY MANAGEMENT: "Loss aversion also explains one of the most common investment mistakes: investors evaluating their stock portfolios are most likely to sell stocks that have increased in value. Unfortunately, this means that they end up holding on to their depreciating stocks. Over the long term, this strategy is exceedingly foolish, since ultimately it leads to a portfolio composed entirely of shares that are losing money. Even professional money managers are vulnerable to this bias and tend to hold losing stocks twice and long as winning stocks. Why does an investor do this? Because he is afraid to take a loss—it feels bad—and selling shares that have decreased in value makes the loss tangible. We try to postpone the pain for as long as possible...The only people who are immune to this mistake are neurologically impaired people who can't feel any emotions at all. In most situations, these people have very damaged decision-making abilities. And yet, because they don't feel the extra sting of loss, they are able to avoid the costly emotional errors brought on by loss aversion," writes Jonah Lehrer in his new book, How We Decide.
LOSS-AVERSION AND WAR: Nations have gone to war until their doom because of loss aversion. It simply means you refuse to admit you made a mistake. "Once we have committed a lot of time or energy to a cause, it is nearly impossible to convince us that it is unworthy." The real question is, "How bad do your losses have to be before you change course?" (Social Psychology Fourth Edition, Aronson et al., p. 175)
We are risk-loving over losses
and risk-averse over gains.
