Loss Aversion (Word For The Week)
Every trade, investment, or adventure that promises profit always carries a risk of loss.
There is nothing like a sure-banker. There is no risk-free or loss-proof enterprise. The moment you decide to give it a try, as the “street bible” will say, “na we dey throw dice, na Baba God dey give double six.”
If the subject of the possibility of loss never comes up, most people are enthusiastic about investing.
What differentiates seasoned and veteran investors is that they always wait for the topic of possible loss to come up.
And if the capital seeker is refusing or avoiding bringing it up, they are not scared to ask.
What are the risks or incidents that can lead to losses? How much is the possible loss from each scenario? What is the acceptable level of loss? What can be done to remedy it? How quickly can such a loss be reversed?
The conservative investor leans more towards risk aversion than loss aversion.
A smart investor tries to look at the numbers behind both risk and loss aversion. They are also interested in the story that justifies both positions. They know what level of loss is acceptable for a projected profit margin.
Loss aversion does not exist in the dictionary of the aggressive investor. They take the biggest risk and can get massive losses.
But each call they get right gives them exponential returns. Their profit margin is massive enough to make up for each loss.
What distinguishes loss aversion from risk aversion is that the utility of a monetary payoff depends on what was previously experienced or was expected to happen.
Loss aversion is most times a product of getting your fingers burnt from previous experiences. Or knowing someone who has.
Wealth is never gotten by erring on the side of caution. Risk must be taken, but wisdom is profitable to direct.
Before investing, make all necessary findings. Educate yourself, then invest.
There is that scattereth, and yet increaseth; and there is that withholdeth more than is meet, but it tendeth to poverty.
The liberal soul shall be made fat: and he that watereth shall be watered also himself.
– Proverbs 11:24-25 KJV