It’s only human nature. Isn’t it?
No one likes to make a loss. It hurts and it makes sense to take whatever steps are needed to avoid unnecessary losses in all areas of our lives.
However, if you are a director or senior manager of a financial services provider, you will be aware of the frustrations you experience watching clients make apparently irrational decisions based on the common human tendency that causes people to value avoiding loss over acquiring equivalent (or greater) gains. You also no doubt know that this is caused by the behavioural bias called Loss Aversion.
Loss Aversion manifests itself in many ways, including (unsurprisingly) in many financial transactions. For example, investors find themselves hanging onto their investments, even when they’re performing poorly and are likely to do worse, rather than cutting their losses and getting out. This may be driven by the notion (however unlikely this is to happen in reality when an investment is plummeting in value with no realistic hope of change) that as long as a loss isn’t crystallised, there is still hope that the value will return to its original level.
Thus the bias creates the illusion that the need to experience the pain of loss can be indefinitely postponed or entirely avoided. Conversely, selling in those circumstances would mean that the loss is made real and unredeemable and the pain has to be felt.
Of course, waiting longer may be in vain, leading to even bigger losses. Just as importantly, failure to sell means that the investor’s remaining money cannot being put to better use by buying a superior investment which may gain in value and help to compensate for the earlier loss.
Wi-Ai’s behavioural bias software tools give financial services providers a means of offering their customers personalised insights into a range of biases that affect decision making for all of us, including Loss Aversion.
We can’t stop your customers making decisions that lead to losses. We can’t stop them making even worse decisions that mean they don’t cut their losses when that would clearly be the rational choice.
However, our tools can give you the wherewithal to provide customers with an enjoyable and non-judgmental way of looking at and challenging their own decision-making process. This offers them greater agency and both you and your customer the prospect of investment decisions which serve both of you better, because they are not driven by self-sabotaging behaviour caused by biases such as Loss Aversion.
Want to know how we do it? Get in touch via [email protected]