MichaelAaron Flicker

It may be the one that the data shows you to take, but there might be a lot more going on behind the scenes.

So when you think about investing,

We want to reveal these behavioral science insights, these psychological tricks to help people analyze brands, businesses that they might invest in, but also analyze their own motivations and their own actions to better understand what might be at play.

Because the more that you understand how the human mind works, the more you can work with it rather than against it.

The more you work with it, the more effective you're going to be.

Absolutely.

So first of all, the definition by the social scientists would say loss aversion is the tendency to feel the pain of losses more intensely than the pleasure of equivalent gains.

And that can lead, as you're saying, to holding losing investments for too long or being too risk averse on new opportunities because that fear of loss.

So the academic study that backs this up is actually fascinating.

So let's start there and then we can talk a little bit about the impacts.

Israeli psychologist Amos Tversky and Daniel Kahneman.

It's 1979.

And they think of this experiment.

What if we offer people a bet on a coin flip?

Tails, they lose and they have to give us $10.

Heads, they win and they win $10.

The researchers wanted to know the amount people would need to be offered before that win was worth the loss bet.

How much would they have to get paid?

in order to be worth a $10 loss.

And the key finding was that most people wouldn't gamble unless they were set to win at least $20, meaning they'd rather not risk losing 10 unless the potential reward was double that, $20.