Loss Aversion refers to our powerful tendency to prefer avoiding losses over acquiring equivalent gains. In fact, some studies suggest that the pain of losing can be twice as powerful as the pleasure of gaining.
While there are downsides to Loss Aversion, it isn’t all bad news.
For example, naturally having a stronger reaction to threats than to opportunities is a clear example of our survival instinct. Even in the financial realm, Loss Aversion helps us steer clear from potentially ruinous investments.
Loss Aversion becomes a problem, however, when the fear of incurring losses prevents individuals from taking even well-calculated risks, with potential for worthwhile returns.
So when somebody doesn’t sell an inappropriate (and worsening) investment, strictly because they do not want to take the loss, that’s unhelpful Loss Aversion.
Or when someone very prematurely sells a rising stock, solely to lock in the profits, that may well be our friend Loss Aversion again.
It may come from a place of self-protection, but Loss Aversion can end up as self-sabotage.
Wi-Ai Technology Limited helps the clients of financial services companies to understand and take ownership of biases like Loss Aversion. Want to know how we do it? Get in touch today at [email protected].
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