Wealthcare Investments

Loss Aversion Bias

In the series of 21 behavioural biases we will discuss the 12^th bias “Loss Aversion”

Human mind is programmed to remember the bad incidents or events more profoundly than the good ones. If I ask you to recall a recent event, most of you will talk about the bad event than a good one. Mind brings forth the bad event first. In fact most people are also liking to hear the bad/sensational news!! This happens due to Loss Aversion being at mind and recalls it first.

We forego doing too many things in life due to Loss Aversion syndrome. Let’s take an example- If you were to decide to do 10 KMs marathon, you would first recall of bad consequences rather than pride, endurance and health which are very positive outcomes!! Agree??

While you are at decision making stage, you will recall, how Mr X injured or took ill due his decision of 10 KMs marathon resolution. But we don’t believe that other 100s of people who are like you, have trained themselves and done it successfully😁 . We are more sensitive to negative loss than positive gains!!

Let’s see how people behave in investing? There are people who are extremely loss averse and put all money in FDs, RDs and PPF etc. There are some who believe that property is also safe as it may not give returns but never gives losses. Do you agree? Reality is property prices also drop just that you don’t trade often and there is no price flashing on screen. Also its thinking error that property is safe as it doesn’t depreciate. Ask yourself if you are investing for capital protection or capital growth?? Let me also articulate that even equity investing is not safe and superior to Fixed Income products and Property. All I am saying is one should not be blind to safety and not consider equity investing. Allocation in various asset classes helps optimize return and mitigates risks. Also protects your wealth from evils of Inflation and provides liquidity.

“We fear loss more than we value gains” in investing, both are notional in nature until and unless we book it. People marry their loss making Investments and flirt with profit making Investments. Meaning they become short term investor in profit making investments (due to loss aversion) and stay long(est) term where there is loss.  

Loss aversion is part of our core personality and can’t be avoided or altered completely. Loss aversion comes from fear.

We must have fear and loss aversion but how much is more important!👍

At Wealthcare Investments, we pay attention to risk-reward metrics at given point of time. Our active management core is “Is market providing returns at reasonable risk or higher risk”

When we see risk is higher, we move to safety. When we see risk-reward is favorable, we take aggressive calls. If you are investing with us, you have seen that in 2013-14 (when we were bullish) and 2017-19 (when we were conservative).😊

What should you do?

1)      Remember than all asset classes have risks, velocity can be more or less.

2)      Realize that inflation beating returns are real returns. Rest is eye wash.

3)      Do not be emotional about the loss making Investments. Don’t marry them. Get rid off them quickly. It will kill anxiety in you.

4)      Avoid being speculator. Speculator looks for high returns in shorter time. Investors are patient long term players.

5)      If you loss averse and cant handle it. Don’t check your portfolio often, appoint good advisor and follow him. Some day you will learn to manage your anxiety and transform into wise investor.

MF Trivia: If you are loss averse. Not to worry there are Mutual Fund schemes which can take care of Volatility to a great extent and can provide you smooth experience over a period of time.

This article is written by Bhavesh D Damania founder of Wealthcare Investments.

You can reach him at 9833778887 and wealthcarein@gmail.com

"Risk comes until you know what, where and why you are Investing"