Loss aversion

Loss aversion vs risk aversion - do you know the difference? This post touches on prospect theory, the disposition effect and impression management.

Imagine you got a letter from your bank indicating that they made an error to undercharge you, and now you have to pay a bill for $1,000. How do you feel? What could you have done with the money? How long will this feeling of loss linger?

Loss aversion is a cognitive bias that suggests that for individuals the pain of losing is psychologically twice as powerful as the pleasure of gaining.

Loss aversion teaches us that if we want to convince someone of something, we shouldn't focus on the advantages. Rather highlight how it will help them avoid the disadvantages.

It is often used by marketers to influence consumer decisions. 1. Free Shipping: Many retailers offer free shipping as a way to entice customers to make a purchase. Customers are less likely focus on the cost of the item due to the perceived loss of not taking advantage of the free shipping. 2. Discounts: By offering a discount, customers are more likely to purchase the item due to the perceived loss of not taking advantage of the discount.

“The irony of obsessive loss aversion is that our worst fears become realized in our attempts to manage them.” – Daniel Crosby #trading #investing #portfolio

In theory, companies create value for stakeholders by making risky investments. In practice, however, managers in large corporations routinely quash risky ideas in favor of marginal improvements, cost-cutting, and “safe” investments. Why are managers in large, hierarchical organizations so risk-averse? Corporate incentives and control processes actively discourage managers from taking risks. Whereas CEOs consider each investment in the context of a greater portfolio, managers essentially bet…

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