Nobel laureate, the late Daniel Kahneman, proposed a question; “How does the experience of a loss compare with the experience of a gain?” There were four possible answers to choose from:
- They are psychologically equivalent
- They are psychologically incomparable
- Gains are twice as pleasurable as losses are painful
- Losses are twice as painful as gains are pleasurable
Which answer would you choose? Kahneman’s research study concluded that losses are twice as painful as gains are pleasurable:
“This phenomenon—known as loss aversion—suggests the pain we might feel from losing $100 is disproportionately more intense than the joy we would experience from gaining the same amount. One implication is that people tend to go to far greater lengths to avoid a loss than they would to rack up an equivalent gain”.
Ironically, in investing, this can inspire people to double down on losing positions and make other potentially costly decisions. If you’re searching for ways to prevent financial losses, reach out to us. We have some options that may help you navigate this situation. We’re always here to help.
