Loss aversion
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 [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]
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