Most of us don’t like losing. In fact, it’s what the academics call loss aversion. We feel the pain of loss more acutely than we feel the pleasure of gain. In other words, we may like to win, but we hate to lose.
The psychologists Daniel Kahneman and Amos Tversky showed that even something as simple as a coin toss demonstrates our aversion to loss. In a recent interviews, Mr. Kahneman shared the usual response he gets to his offer of a coin toss:
“In my classes, I say: ‘I’m going to toss a coin, and if it’s tails, you lose $10. How much would you have to gain on winning in order for this gamble to be acceptable to you?’
“People want more than $20 before it is acceptable. And now I’ve been doing the same thing with executives or very rich people, asking about tossing a coin and losing $10,000 if it’s tails. And they want $20,000 before they’ll take the gamble.”
In other words, we’re willing to leave a lot of money on the table to avoid the possibility of losing.
We see this aversion to loss play out in the lives of real people when we try to make smart money decisions, especially when it’s time to make a change to our investments. It almost doesn’t matter what change we need to make. We hesitate to change from the current situation because it means having an opinion and making a decision. And with a decision comes the very real possibility that we’ll make the wrong one. Sticking with the status quo feels much better even if we know it’s costing us money.
To get past our aversion to loss, I recommend taking the Overnight Test.
Imagine you went to bed, and overnight someone sold your losing stock and replaced it with cash. The next morning, you have a choice: You can buy back the stock for the same price, or you can take that cash and (do something else with it). What would you do?
Most people wouldn’t buy the stock back.
Just by changing your perspective (investing cash versus getting rid of the stock), you can gain clarity and have the emotional space to make the decision you know you need to make.
Sometimes, that’s all it takes. While we’ll probably never embrace loss, it’s good to know that we can find ways to work around our aversion to it when it makes sense.
Carl Richards writing in the New York Times