Why Financial Losses Hurt More Than Gains Help

Science has proven that humans psychologically feel the pain of losses 2x more than the pleasure of gains. Given the precariousness of today's bubble asset prices, why would a rational person risk experiencing punishing losses just to possibly eke out a few more percentage gains before the next downturn?

As biological organisms, humans are motivated by pain and pleasure.

But interestingly, while we tend to think of these as equal motivators, they aren't. We humans are wired to be more risk averse than pleasure-seeking. As the works of Nobel recipient Daniel Kahneman explained:

Humans may be hardwired to be loss averse due to asymmetric evolutionary pressure on gains and losses. For an organism operating close to the edge, the loss of a day's food could amount to death, while the gain of an extra days food could lead to increased comfort but (unless it could be costlessly stored) would not lead to a corresponding increase in life expectancy.

And through the related findings of Prospect Theory, we actually know how much more we hate losses than we like gains: About twice as much.

The short video below uses these insights to deliver a simple message: In today's over-inflated, over-leveraged, over-manipulated markets, why on earth would a rational person not be prioritizing protecting their financial wealth?

As biological organisms, humans are motivated by pain and pleasure. But interestingly, while we tend to think of these as equal motivators, they aren't. We humans are wired to be more risk averse than pleasure-seeking.
Tags: Money, Finance, Real Estate, Economics, Stocks, Retirement, Investing, Economy, Financial Adviser, Financial Advisor, Financial Markets, Daniel Kahneman, Asset Bubble, Bonds, Housing Market, Prospect Theory, Market Crash

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