“The one rule I have is I give very general instructions to my financial advisor, and then I don’t monitor it. I think that’s good, both because it causes more anguish than pleasure, on average, and because you’re tempted to make stupid decisions if you monitor things too closely.” – Daniel Kahneman
As Daniel Kahneman so famously described in Thinking, Fast and Slow people are generally loss averse when it comes to money decisions:
Losses loom larger than gains. The “loss aversion ratio” has been estimated in several experiments and is usually in the range of 1.5 to 2.5.
Loss aversion can have a profound effect on how you view your portfolio, especially when it comes to stocks. Most investors claim to be unnerved by uncertainty, but really we all hate to lose money. It’s one of the reasons that crash predictions and negative thinking always seems to sound more intelligent and make more sense.
Written By: Ben Carlson, CFA