Loss Aversion

Loss aversion in behavioral economics refers to when losses loom larger than gains {Kahneman & Tversky}.

What this means is that for most people, taking a loss is more painful than the pleasure of a gain.

An example of loss aversion is when you are given the choice of flipping a coin. If heads, you win $10. If tails, you lose $10. The research shows that most people won't take this deal. The return should be $20 or more for most people to make the bet.

Many people will not sell a stock when it goes down because they don't want to take the loss even if there is bad news. They don't want to admit they made a mistake.

We have programs that allow people to invest in the market and get a portion of the market increase but never take a loss. This means that people don't need to worry about big losses or when to get out. I like to say that you get singles and doubles if the market goes up but you never strike out.

Richard Eisenberg

Eisenberg Associates

617-964-4849

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