For many wealth builders, winning $1000 in the stock market is very different from losing $1000 in share investments. In fact, many research studies have demonstrated that the impact arising from losses is twice as powerful as gains. This strange phenomenon is known as loss aversion.
Coined by Amos Tversky and Daniel Kahneman, loss aversion explains why most people prefer avoiding losses to making gains. Understanding this form of economic behavior may help us become better investors because it can shed some light on why people make irrational decisions consistently.
Our brains are geared to hold on to what we own because in ancient times, our ancestors survived by holding on to resources. As a result of such human evolution, our instinct tells us to avoid making losses at all costs. But what we don’t realize is that in doing so, we often make flawed decisions and end up being financially hurt. This is because times have changed and modern day economics have become much more complex, so we cannot afford to apply the same loss aversion mentality when managing money issues in today’s context.
Most stock investors hate cutting losses because most of us has a tendency to be emotionally attached to what we own as compared to what we do not own. Due to this psychological effect, most of us tend to hold on to losers for too long and miss out the opportunities of investing in winning stocks.
Throughout my wealth journey, I was inspired by many smart and intelligent people who are willing to share with me their investment adventures. Through them, I realize that those successful investors who are able to build up their wealth are those who have strong “Financial Quotient (FQ)”. These are the people who keep making mistakes in their stock selections but they view losses very differently from the man in the street.
People with high FQ are able to embrace loss and overcome loss aversion mentality. They look at things from the big picture level and view losses as investment expenses necessary to achieve the goal of financial freedom. They don’t allow investment losses to inflict emotional scars on them but view losses as learning opportunities to improve to another level. Many people would deem such characteristic as being confidence but I see it differently. Confident investors may not be able to accept investment or financial setbacks. Instead, resilient investors are the exceptional players who are able to bounce back from losses, learn from their mistakes and go on to outperform from the rest of the mediocre investors.
Of course, being able to overcome the loss aversion mindset does not guarantee success in your wealth journey. In life, there are several critical success factors that determine your wealth success, and loss aversion is just one of them that you have to overcome in order to keep an open mind. Being loss averse, you tend to focus on what you stand to lose, rather than what you may gain. As a result, you are unlikely to spend money in gaining new knowledge to make better investment decisions. This is because you would tend to associate such expenses as “losses”, instead of “investment” that will yield bigger returns in the future.
Learning how money is made in the stock market is not easy. You need to learn how to develop strategies and interpret movements in the stock charts. But beyond that, investors must be wary of behind the scene developments – the Big Boys’ movements. Stock picking is just one aspect of the game. To avoid losses, always ensure that you do not go against the Big Boys. Fellow investment blogger, Dave of Trade With The Whale has this ability to spot Big Boys movement in the derivative market.
Many readers queried about the benefits of signing up Dave’s VIP membership. As member, you have exclusive to his trade strategies, his trade analysis and spotting of Big Boys’ movements. If you trade the US market, you would probably find Dave’s membership website useful because he has a knack of spotting Big Boy’s movements that may affect the price of a company share.
If you are keen, you can sign up as VIP member at here. The first month fee is USD99. However, if you quote the discount quote: sgwealthbuilder, you get to enjoy a lifetime discounted rate. Hurry up and don’t miss the opportunity to enhance your trading skill!
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