What is loss aversion?
Which is better – finding £10 or finding £20 and then losing £10? Loss aversion is when you’d rather avoid losses than accrue gains. Several studies have shown that most of us tend to feel the pain of loss more acutely than we do the pleasure of a gain.
Where have you heard about loss aversion?
Famous sportspeople often talk about being motivated by their fear of losing rather than the joy of winning. Loss aversion is also used to good effect in marketing. When retailers say 'act now' or 'only 2 left in stock', they’re using the psychology of loss and missing out to get you to buy their products.
What you need to know about loss aversion...
As human beings, it’s only natural we feel loss. And as investors, a bad experience with money can make us more cautious.
Many of you will have focused obsessively on one investment that’s losing money, even if the rest of your portfolio is in the black.
Fear of loss can cause you to miss out on opportunities and make decisions driven by your emotions, such as selling shares that could have gone on to greater things. Loss aversion can be a powerful force in stock market psychology.