Did you know that your brain is hardwired to avoid loss? For over 35,000 years, humans have been naturally programmed to steer clear of risk and protect what we have. While this instinct was essential for survival back in the Stone Age, it still plays a major role in our decision-making today—especially in finance and investments.
In our latest video, we explore the concept of loss aversion, the famous studies by Amos Tversky and Daniel Kahneman, and how this behavioural bias can influence your financial choices. You’ll discover why we often prefer the safe option over potential gains and learn practical strategies to overcome this mindset to make smarter, more confident decisions.
Dive into the video to learn how to recognise loss aversion in your own life, understand its impact on your investments, and discover actionable steps to turn this ingrained behaviour into an advantage!
Transcript:
Human beings are geared towards not losing. Remember, realistically, in terms of our physiology, we’re exactly the same as we were over the last 35,000 years. Our old world brains are still well and truly in here, and you can’t forget that.
Why do I want to start there today? We need to talk about and learn the lessons of loss aversion and how they impact decision-making in the new world that we live in.
Let me go back to why I want to start with what our old world brains do. Think about it from this perspective. Back in the old days, and I’m talking stone ages here, shelter and food were certainly the most important things for us. The ability for us to survive was based on those two things.
If we lost food, we could die. If we couldn’t find shelter, we could die.
Now, I know that’s quite archaic, and that’s a deliberate term there. The reason you need to remember that is it also means that loss aversion is now built in as an underlying common behaviour in everyday life in the modern world because decision-making is absolutely influenced by it.
There are a plethora of studies. The most famous ones are by Amos Tversky and Daniel Kahneman around how loss aversion, particularly in investing, really plays out. We would rather take the risk-free option than make a small amount of risk. But when all risk is on the table, we’ll take the highest risk to try and get back to neutral rather than actually taking a certain loss.
Let’s bring that into the new world because it brings around decision-making. Decision-making is based entirely on that concept. Think about when you look at a property you want to buy. You’ve gone through a lot of research and applications. You’re all lined up and ready to go. But there will be, and I know there is, a part of your mind going,
“You could lose here. Do you really need to do this? Why would you do this? Is this actually going to help me now?”
Now, the whole idea of loss aversion is to protect yourself from the now. But we live in the modern world. We must start thinking about what’s happening not now, not next week, not next month, not next year, but in the next 10 years or 20 years. How am I making the decisions that I need to affect all of my movements going forward?
You’ve got to override that old world brain, that loss aversion that’s stopping you. You just need to be aware of it because it’s a very good protection mechanism. And that’s great, but it also creates inertia, creates non-decisions. There are so many ways and reasons to stop yourself because that is your old world brain coming out. Loss aversion is there to protect you.
So how do you get around it?
How do you get through loss aversion, which is clearly telling you to stop and not do something?
It comes down to your programming, automation, and discipline. Automating your overall procedures is one way to get through it. That means having things like offsets, having all of your loan repayments set up, and having all the automation around your paperwork done for you. Because if you start reviewing it again, that loss aversion can come to the fore and create uncertainty, which can lead to non-decisions, resulting in a bad outcome.
The next thing is your research. Understand that once you start putting proper information in front of you, you don’t have to make completely economically rational decisions, but you’ll start making reasonable decisions.
You can start “trade-offing” around what your loss aversion brain is trying to say—that you could go wrong here—with the reasonable, rational thought,
“My long-term investments show that I’m going to get through this, and the long-term delayed returns, which I know I don’t like, show over history that they will actually be in my favour, and a small bit of risk now will be a much, much better return for me in the future.”
That’s how you get around loss aversion. It’s a protective mechanism, and that’s great, but it’s also a mechanism that can work against you.
So do your research, automate your processes, and overcome what is one of the most long-term ingrained behavioural problems we have—just trying to protect ourselves.
If you’d like to find out how Moorr can help you with this, create your free Moorr Account today!
