Nobody likes to lose
There was a time I was rushing to buy a jacket. I saw one that was the perfect fit and what’s more, it was on sale at 50 percent off the regular price! It was a no-brainer.
When my sister saw the jacket I bought, she said that her husband was able to buy a similar jacket under a different brand for half the price I paid. I gave no importance to her comment as I considered my jacket to be superior, even though the jackets were almost the same.
One week after buying my jacket, I went back to the store where I bought it. To my surprise, the same jacket was now selling for half the price I paid. I was furious to say the least and even asked the store to recheck the price. Apparently, the store decided to mark down the price further for their going out of business sale (which was not announced when I first visited the store).
Many things were going through my mind. On the one hand, I thought of buying another jacket so that I could avail myself of the going out of business sale and not feel that I had missed out on a good deal. But that would be falling for the sunk cost fallacy that behavioral economists talk about, of allowing past actions to dictate future ones when they should not matter anymore.
On the other hand, I could tell the store to raise its price back to the level it originally charged me, so I would not feel “cheated.” But their pricing is their call, not mine.
My thoughts were driven by the broader behavioral economics theory of loss aversion.
Behavioral economists say that with people, losses hurt more than gains please. In other words, the intensity of the pain in losing is much greater than the intensity of the joy in winning. And this is true even if it is a matter of losing a small amount like P20 versus gaining the same P20.
People are simply loss averse and that loss aversion dates back to the time of the cavemen when every day was a matter of survival. Years of evolution have ingrained that loss aversion in the psyche of humans.
Loss aversion is part of daily living, including stock trading. People suffer from disposition effect when, in trading stocks for example, they sell winners too soon to lock in the profits and hold on to losers too long in the hope of seeing the price move back up (even if there are fundamental reasons for the price to stay low and keep the investment under water).
Loss aversion is good as it makes people aware of the risks involved in life, including investing. But too much loss aversion also leads to inefficient and even ineffective investing.
As we wrote in our book, “Taming the Rebellious You,” being afraid of the risks in investing is similar to having a healthy respect for and understanding of them. Being scared of the risks is just being plain fearful.
So, when it comes to loss aversion, just be afraid of the losses and not scared.
