loss aversion
Loss aversion is the fact that losing money hurts far more than gaining the same amount feels good, which makes us behave badly.
In plain English
Losing ₦100,000 hurts roughly twice as much as gaining ₦100,000 feels good. This has been tested repeatedly and it is true of almost everybody, including people who are certain it is not true of them.
This lopsidedness quietly explains most bad investing behaviour.
It is why people sell during a crash. The pain of watching the number fall is unbearable, so they sell to make it stop, and in doing so convert a temporary decline into a permanent loss.
It is why people hold onto a failing investment for years, refusing to sell, because selling makes the loss real and holding allows them to keep pretending.
It is why people leave everything in a savings account, where the loss to inflation is invisible, rather than invest, where the loss would be visible even though the outcome is better.
The defence is not to feel differently. You cannot. The defence is to decide in advance, while you are calm, and then remove your own ability to interfere. A standing order that invests every month without asking you. A rule that you will not sell during a fall.
You cannot outthink the feeling. You can arrange your life so that the feeling has nothing to do.
The market falls 30 percent. Everything in you wants to sell and stop the pain. Because you set up a standing order and wrote down a rule when you were calm, you do nothing, and three years later you are considerably better off than the people who acted on the feeling.
Questions people ask
Why do I panic when the market falls?
Because loss hurts roughly twice as much as an equal gain pleases. It is not weakness, it is how almost every human is built.
How do I stop myself from selling at the bottom?
Automate your investing, write your rules down while you are calm, and check your portfolio far less often. Most damage is done by people watching too closely.
Does this affect savers too?
Very much. Fear of visible loss keeps enormous sums in savings accounts, where inflation removes value invisibly. The loss is real, it is simply harder to see.
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