You have this old T-shirt in your closet. It’s been there for years now.
The color is faded. The cloth is worned out.
Yet, you wouldn’t let that go.
You could toss it out in the dustbin. But you don’t.
What’s made you stick with it?
Ever wondered what stops people from investing in stocks?
|Who would recover faster?
Someone with a shattered knee or with a slight knee injury?
You’d say it’s obvious. The one with a slight injury.
But the study found something different…
The person with severe injury was likely to recover more quickly than the one with mild injury.
Because someone with a serious injury is more likely to take it seriously - check with doctors, get the right treatment, stay cautious, and take care of themselves.
If they don’t take enough care of it the injury would increase. They might lose their ability to walk.
Someone with a mild injury is casual about it. There isn’t much to lose.
Let's talk about a psychological bias.
We feel the loss more than we feel the benefits.
Loss motivates us more than the profits.
This is why you felt the dark pain of losing $20 than you felt pleasure about winning $30.
Gloria Barret was a financial adviser. She helped people manage wealth.
Her younger clients invested aggressively.
But some were very cautious.
Keith was one of her clients who was just too conservative. He was in his mid forties. Half of his money was in savings and he just didn’t agree on investing.
Gloria showed him reports and analysis. As if she was guaranteeing higher returns.
Yet, Keith didn’t agree.
Keith was satisfied with the minimum he was making through the bank interest.
He wasn’t convinced to invest. Nothing was working with him. And, this got Gloria frustrated.
She decided to take a different approach.
Instead of highlighting the upsides, she started talking about how he was losing money by keeping it all in the savings.
Gloria started to share how much he could have made if he had invested.
At first, it was a few dollars.
That didn’t move the needle.
In a few days, it was in the hundreds, and then thousands.
“You’re losing this money,” She said.
“How am I losing it when my savings account balance is going up?” asked Kieth.
“Sure” She replied, “but that doesn’t account for the inflation. And compared to what your performance would be, even in a conservative investment, you're losing a good bit.”
Kieth grumbled about it.
When the losses reached a few thousand dollars, he broke down.
He switched most of his savings into investments. And, he made good returns.
That’s how loss aversion works.
If you want someone to something. Heck. Even if you want yourself to do something you don't feel enough motivation for, change your approach.
What would it cost if they (or you) don't do it?
Till next time,