Tldr; Loss aversion makes people more focused on avoiding losses than achieving gains, leading to overly cautious, emotionally driven decisions in money, work, health, and daily life.
Did you know that the prospect of losing, is more than twice as painful as the joy of gaining and is the # 1 rule that prevents most people from being truly successful investors over their lifetime.
This theory was studied in 1979, by Daniel Kahneman and his associate Amos Tversky who coined the term “Loss Aversion” and plays a significant part in our overall success in life.
Ask an elderly person what their biggest regret in life is (aside from wishing they'd spent more time with friends and family) and they’ll tell you they should have taken more risk’s, particularly in their younger years.
To simplify. The pain and shame of losing $1,000 to a scam/fraud/misfortune is significantly greater, than the joy of being given an unexpected $1,000 bonus by your employer.
Here are some examples of how this impacts our daily lives:
Avoiding Salary Negotiations: Not negotiating a job offer or raise for fear of losing the offer or damaging the relationship.
Keeping Unused Subscriptions: You keep paying for that streaming service you no longer use, just in case a show comes out and you can no longer watch it.
A whole industry is built on this same theory. It’s call “Insurance”. The fear of losing your car, house, job… life..
Pro Tip: Remember, you’re being manipulated whenever you see terms such as “Limited time offer”, “Only 3 left in stock”, “Free trial”, or “Keep your loyalty benefit’s”. Ask yourself, “What am I actually losing”.
So how long have we been like this? It would seem it goes as far back as prehistoric times. EG Your group has small game secured, but there’s a chance to hunt a larger animal.
- Large prey = more food for the future
- But also = high risk of injury or death
An injury may mean you cannot hunt for tomorrows food. One broken leg may mean death. The risk was far greater than the reward of a greater bounty so you stuck to hunting for small food, more frequently rather than stockpiling reserves.
Now when you apply these same principles to an asset such as BTC that can experience “losses” of 50% or more in less than a year and everything becomes dramatically amplified.
New investors are attracted to the incredible gains that potentially await them but are quickly discouraged by the possible losses they may have to endure during a bear market. While the former may seem tantalising, it can become impossible to reconcile the later scenario of loss.
In extreme case, some people are so fearful, rather than make the wrong decision, they don’t make one at all and spend their lives not financially investing for their future. Even more tragic is they don’t end up investing in anything at all. Job’s, career, relationships but I’ll save that discussion for another day.
So what is the answer! Well, everyone is on their own journey so don’t get too caught up in what you “should” and “should not” do. Just be mindful that this rule exists and while it may have served us well 3 million years ago, those same fears may not be as applicable today.
Try and mitigate your fears and for me, that meant educating myself on the ”why” of BTC. Then when you experience the bear market, you can remind yourself that despite it going down in price, the “why” has not changed. BTC will continue its journey up, down, sideways. So long as they keep printing more money, BTC will become more valuable.
Good luck on whatever journey you chose.
If you’re interested in more info: https://en.wikipedia.org/wiki/Loss_aversion
The 2 × Pain Rule That Makes Bitcoin So Emotionally Hard to Buy and then HODL.
byu/WarthogOpen7003 inBitcoin
Posted by WarthogOpen7003