![]() ![]() ![]() Instead, cultivating a healthy relationship with risk could be the key to gaining in the long term and helping to counteract a loss aversion bias. While it’s natural – and often prudent – to try to avoid loss, letting that fear loom too large over your financial decisions could actually lead to the very thing you’re afraid of. But it doesn’t have to be what holds yours back. Too strong an aversion to loss can hinder a financial plan’s progress. Source: Kahneman, Daniel (2011) Thinking, Fast and Slow, New York: Farrar, Straus and Giroux THE GUARDRAIL You may take on unwise risks to try to counteract an existing loss.Ī study of people’s reactions to gains and losses found participants’ reactions to losing $10 were twice as strong as to gaining $10.You might operate too fearfully and miss out on opportunities based on a past negative experience, like a market crash or a saving goal you fell short of.Sentiment might prompt you to hold on to possessions – or investments – that were gifted to you, even if they aren’t the best fit for lifestyle or goals. ![]() You may put off uncomfortable conversations around disability, long-term care and legacy planning.You might hold on to investments that keep losing value because you refuse to sell below a given amount.When loss aversion factors into your financial decisions: A yacht can be a worthwhile investment for some, but if you don’t have time to enjoy it, the upkeep might cost you more than it’s worth. It can also be hard to come to terms with the reality that a purchase may not have panned out like you’d thought. The unwillingness to part with something for less than you paid for it can keep you clinging to declining investments, whether it’s a stock or depreciating property. That fear, when applied to buying and selling investments, can hold you back when it comes to long-term financial planning. And while he and his colleagues found that brain activity was heightened by both possibilities, it was markedly stronger when participants faced losses. Money is frequently one of the things people are most afraid of losing, which means loss aversion can become even more influential – and potentially damaging – when it comes to your finances.Ī 2007 study conducted by Russell Poldrack, a professor of psychology at Stanford University, monitored participants’ brain activity when presented with potential monetary gains and losses. Source: Journal of Experimental Psychology: Vol 144(1), Feb 2015, 7-11 IS FEAR OF LOSS HOLDING YOU BACK? The average person is willing to risk a potential loss only if they stand to gain at least double that amount. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |