A benefit of loss aversion within the financial realm is its ability to help us shy away from investments that are potentially ruinous to our financial health and lifestyle.Behavioral science experts Amos Tversky and Daniel Kahneman performed an experiment which resulted in a clear example of human bias towards losses. 2. 3. The unwillingness to sell your house for less money than you paid for it.7. The experiment involved asking people if they would accept a bet based on the flip of a coin.

For example, if a user wants to lose weight, the decision to not go to the gym may be coupled with the fear of loss—a cash penalty in the case of non-compliance. A benefit of loss aversion within the financial realm is its ability to help us shy away from investments that are potentially ruinous to our financial health and lifestyle.Behavioral science experts Amos Tversky and Daniel Kahneman performed an experiment which resulted in a clear example of human bias towards losses. This is because they can avoid psychologically or emotionally facing the fact of their loss as long as they haven’t yet closed out the trade. This behavior is at work when we make choices that include both the possibility of a loss or gain. The negative effect o…

For example, when making investment decisions we most often focus on the risks associated with the investment rather than the potential gains.The loss aversion bias is not always dreadful to have, as in many cases it is beneficial to our way of life.

Let our awareness not only prevent us from making irrational decisions but also help us to achieve more. Naturally responding more powerfully to threats than to opportunities is a clear example of our innate survival instinct.

In their subconscious, if not their conscious, thinking, the loss doesn’t “count” until the investment is closed. An inability to distinguish between a poor outcome and a bad decision when feeling regret after taking a loss.First seen at HIT Investments - Subscribe to our newsletter Peter Sokol-Hessner et al., “Thinking Like a Trader Selectively Reduces Individuals’ Loss Aversion,”Nathan Novemsky and Daniel Kahneman, “The Boundaries of Loss Aversion,” Not accepting a deal below your baseline, not because the deal was poor, but because you could not bear the concession.5.

The unwillingness to sell your house for less money than you paid for it.7. Not selling a stock that is below the price you paid strictly because you do not want to take a loss. The results of the experiment showed that on average people needed to gain about twice (1.5x – 2.5x) as much as they were willing to lose in order to proceed forward with the bet (meaning the potential gain must have been at least twice as much as the potential loss).If we are not aware and do not account for the bias towards loss it can push us away from Loss aversion derives from our innate motive to prefer avoiding losses rather than achieving similar gains. If the coin came up tails the person would lose $100, and if it came up heads they would win $200.

Selling a stock because it is greater than the price you paid just to lock in the profits.4. Knowing that this bias exists and how it affects our decision making is our ultimate goal.

Selling a stock because it is greater than the … Many investors don’t acknowledge a loss as being such until it is realized. Visiting your financial advisor with a goal of building wealth and walking out with a life insurance policy.11. © Copyright HIT Investments, All Rights Reserved | Selling winning investments instead of losing investments for the sole reason of not accepting defeat.14.