Loss aversion is a cognitive bias that is frustrating regarding money. James has talked about loss aversion and cognitive bias in previous shows. Today he is going to couple loss aversion with benefit discounting and how this can create a toxic financial mix. Humans will prioritize avoiding loss over achieving a gain.
This can ultimately lead to bad decisions and losing even more in the long run by avoiding any risk that would lead to gain. He discusses how to think about the market in today’s climate regarding feelings of loss aversion and benefit discounting. Ultimately, we can have the best intentions but still hold ourselves back from creating more considerable gains.
Episode Highlights:
[02:47] Humans will make decisions to avoid loss. We will even prioritize avoiding loss above opportunity for gain. It’s counter intuitive, but it’s something James sees all the time.
[03:18] The attention we pay to loss is an incredible multiple compared to the attention we pay to gain. Risks we take to avoid loss are sometimes greater than the risks we take to achieve gain.
[04:56] We are afraid of loss. All of the news about the market being down etc. is dialing our loss aversion up to 11.
[06:53] Our ancestors had a powerful motivation to avoid loss aversion, because someone had to go out and hunt or everyone would die. They overcame loss by realizing the importance of the gain.
[07:50] We don’t have that pressure now, so loss aversion can run over us. The risk of not taking risks is too far into the future. We discount the benefit of taking the risk of investing in our future. This is benefit discounting.
[09:55] The market is our friend. It will get us where we’re going if we just get out of its way. We can’t see it, because the benefits all happened in the past.
[12:26] As all the news about the market being volatile comes out, loss aversion is going to be triggered. Our most powerful tool against loss aversion is to prevent the benefit discounting.
[13:04] We’ve done this before and the market has been creating wealth all along.
[13:49] Trying to avoid loss creates the ultimate risk. Not will create your future success.
