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Loss Aversion

Do you have loss aversion behavior?


One of the great things about my business is that I make time to read volumes of books and studies on economics, behavior, and investment management strategy.

I am a big fan of the work of psychologist Daniel Kahneman.  His work, along with his late partner Amos Tversky, has taught me a great deal about how Minnesota stock market investors really make decisions on the money they have invested in the stock market.

Kahneman and Tversky were the behavioral psychologists who first demonstrated the theory of loss aversion.  Loss aversion refers to an investor’s tendency to prefer avoiding losses rather than acquiring gains.

The research work done by these two brilliant psychologists found that investment losses are about twice as powerful psychologically as are investment gains to individual investors.

It is psychologically more satisfying to not lose money in your company retirement plan account than it is to try to “make money” in that same account.

I see this same investment psychology at work every day in my individual company retirement plan participant advice practice.  I see loss aversion behavior from clients I have worked with for over 20 years; and I see it from individual company retirement plan participants that I meet for the first time.

Many individual company retirement plan participants are still in shock over their company retirement plan account losses from the last great stock market decline; July 2008 to March 2009.

After this historic stock market decline, many individual company retirement plan participants realized that they are not emotionally or psychologically equipped to make the necessary investment management decisions in their company retirement plan accounts on their own.

The recent stock market volatility since then has led to many individual company retirement plan participants to become “frozen” in their investment management decisions.

Most company retirement plan participants are in a lose aversion phase now. That is why “buy-and-hope” and “stay the course” are the most common company retirement plan investment strategies.

Not losing money in their company retirement plan accounts is the number one investment objective for most 50-plus retirement plan participants.

With the stock market levels currently at multi-year high levels, now is a good time to take notice of your own loss aversion behavior.  Make certain that you have a stop-loss level set in all your stock market investments.

To remain fully invested at all times in rising stock markets going forward may have a marginal affect on your investment account values.

To remain fully invested at all times in falling stock markets going forward may take you years to recover.  Just like it did in the last 2008-2009 stock market decline.

Ric Lager
Lager & Company, Inc.

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