“Oh the tangled web we weave when first we practice to
deceive” Sir Walter Scott eloquently penned the tragedy of deception. The most
telling deception though is self-deception. We suffer with this tragedy on a
daily basis.
No more telling aspect of self-deception than that of
loss aversion. Basic human nature holds that we move towards pleasure and away
from pain, yet in this avoidance we feel and remember the pain more
consistently than the pleasure. One of the basic laws of psychology is simply
that we get more of that which we focus on then that which we do not. The most
telling thoughts in one’s mind manifest the reality of experiences for that
individual. Therefore it follows that when we spend psychic energy in the
practice of avoidance we get more that which we seek to avoid.
A simple example of this is laying golf, for you duffers
reading this I’m sure you have experienced the dreaded “don’t hit it in the
water” trap. The message that the mind is focused on is hit it in the water
not, as the sub-conscious mind does not differentiate between good and bad,
negative and positive. So when you focus on what do don’t want to happen, you
end receiving the very thing you were avoiding and presto the ball is in the
water.
So it is with the concept of loss aversion. The
investment psychology for many is to obsess upon the poor stocks and ignore the
totally successful aspects in the portfolio. We are perfectly willing to sell
and take some profits, but bitterly opposed to selling off losers. This also
leads to the most dreaded of all behavior the buy high sell low syndrome. Loss
aversion is the basic foundation to this process of consistently buying high
and selling low.
Regret plays a role in our loss aversion mentality. It
is regret that leads us to non-distinguish between a poor decision and a poor
outcome. By falling into regret over a poor outcome we tend to overlook the
good investment decision on a company and suffer during a weak performance
which many times lead to selling off low as opposed to increasing a position at
the bottom of a good investment.
As previously discussed we tend to feel pain more than
pleasure and this combined with regret tends to lead us down the path of
staying too long when we refuse to move on the early pain.
Recognizing these behaviors is the first step in
proactively taking control of our thoughts and processing information in a new
and improved style.
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