Behaving Better: Loss Aversion
It's a sudden sense of uneasy urgency...
It's a sudden sense of uneasy urgency.
We check out our portfolio seeing on the screen a holding flashing red. The ticker dips lower with each flash.
We find ourselves feeling squeamish with the urge to sell the holding.
This feeling is known as “Loss Aversion.”
It's one of the seven common biases I touched on in my last post where I introduced the topic of behavioral finance. And why we itch to cut impending losses.
Loss aversion is an outsized fear of bad stuff happening to us. This leads us to generally avoid losses, as opposed to acquiring equivalent gains.
Studies suggest the anguish we feel in losing money outweighs gaining the equal amount.
The graphic below illustrates our feelings (the orange line) in reference to a gain or loss of $100.
We see the negative feelings of the loss far outweigh the pleasure of gaining the equal amount.
This anguish can lead us to panic selling.
Doing so alleviates temporary distress.
However, it can cause us to miss out on market gains. On top of missed gains we feel guilty or dumb for falling prey to a natural instinct. Which are amplified as we watch markets, or the stock we sold, to then march higher.
And the stock market generally marches higher.
Largely, if we can fight instincts, the right thing to do if we are invested in market indexes like the S&P 500, NASDAQ, or MSCI world staving off panic selling is the smart move.
We'll see this below by looking at a chart of “financial calamities.” And how the S&P 500 performed despite such negative events.
In fact, since 1970 the S&P 500 has only had 11 years with negative returns. Or phrased another way, since 1970 80% of the year's investors enjoyed market gains.
Those are exceptional odds.
I’ve learned many lessons as a parent to young kids. And one that rings true to this topic is:
Minutes and hours can seem long. Days go quickly. Weeks, months, then years quicker…
So, in those long minutes of wanting to panic selling for no good reason let's pause and assess the situation.
And hopefully this post comes to mind. Then we exit our investing platform to casually go about enjoying our day.
As always, I appreciate you reading along.
Until next time ✌️,
Let it Compound.
Disclaimer Time!
As always this is not investment advice. Again, nothing here is investment advice.
This information is for educational and entertainment purposes only.
Please, PLEASE, always do your own due diligence. And if need be, consult with an investment professional regarding your finances.