Losing May Not Hurt As Much As You Think
Humans don't like to lose. Whether it is losing a job or a romantic partner, when contemplating the possibility of a loss, the prospect of losing is worse than reality. That is, we tend to believe that a loss is going to hurt us emotionally more than it actually will.
People often base their choices on how they think the outcome of the choice will make them feel. Investors and traders, for example, seem to believe that a loss will hurt more than a win. For example, when contemplating a trading outcome, we are more concerned with losing $1,000 than potentially winning $2,000. Surely, winning $2,000 will make us happy, but the possibility of losing $1,000 is so dreaded that unpleasant feelings of loss far outweigh the potential joy of winning. Psychologists Deborah Kermer, Timothy Wilson and colleagues (2006) at the University of Virginia conducted a novel experiment to illustrate this phenomenon. They asked a group of participants to play 44 trials of a gambling game in which a computer randomly ranked playing card suits (hearts, spades, diamonds, and clubs) from first to last. Participants were asked to guess what the top-ranked suit would be. They won 50 cents if the suit they guessed was ranked first, and won 25 cents if ranked second. They lost 50 cents if their guess was ranked third, and lost 50 cents if ranked fourth. Participants forecasted how they would feel if they lost. After playing the game, participants discovered that they felt must better after losing than they had anticipated: The prospect of losing felt worse than the actual reality of losing.
Why do people think they would feel worse after a loss than they actually do? Kermer and colleagues argue that people have many ways of looking on the bright side, but forget this fact when contemplating a potential loss. People know how to cope with defeat. They build up their ego automatically and unconsciously. These psychological processes happen so quickly that we don't realize we have these coping abilities until we need them. People are inaccurate in their expectations regarding a loss because people do not remember similar losses in the past. They do not accurately remember how they felt and wrongly assume they felt worse than they actually did. What is the solution? The solution may be obvious to seasoned traders: Make a bunch of losses, and repeatedly experience how you cope with them. Once you see how well you can cope with losses, you will tend to be less averse to losses in the future.
Perhaps one of the biggest reasons that losses are hard to handle is that losing money is not socially accepted. If you told your frugal parents, for example, (who were unfamiliar with trading) that you had lost $20,000 last month, they would treat it like a tragedy. It may not be a great feeling to lose such a large amount, but as most traders know, losses are commonplace and you must take them in stride and move on to the next trade to make profits in the long run. It is easy to put yourself in a fearful, pessimistic state of mind by allowing conventional social standards about losing money to make you feel awful. But with the proper mindset, you can cope with losses and the prospect of losing money. First, remember that losses are just an everyday fact of life when trading the markets, and that losing is not morally wrong. Second, remember the times you have lost in the past but survived to trade earnestly and make huge profits. When you are stunned and paralyzed from the prospect of losing, remember that the prospect of losing is much worse than reality.
People often base their choices on how they think the outcome of the choice will make them feel. Investors and traders, for example, seem to believe that a loss will hurt more than a win. For example, when contemplating a trading outcome, we are more concerned with losing $1,000 than potentially winning $2,000. Surely, winning $2,000 will make us happy, but the possibility of losing $1,000 is so dreaded that unpleasant feelings of loss far outweigh the potential joy of winning. Psychologists Deborah Kermer, Timothy Wilson and colleagues (2006) at the University of Virginia conducted a novel experiment to illustrate this phenomenon. They asked a group of participants to play 44 trials of a gambling game in which a computer randomly ranked playing card suits (hearts, spades, diamonds, and clubs) from first to last. Participants were asked to guess what the top-ranked suit would be. They won 50 cents if the suit they guessed was ranked first, and won 25 cents if ranked second. They lost 50 cents if their guess was ranked third, and lost 50 cents if ranked fourth. Participants forecasted how they would feel if they lost. After playing the game, participants discovered that they felt must better after losing than they had anticipated: The prospect of losing felt worse than the actual reality of losing.
Why do people think they would feel worse after a loss than they actually do? Kermer and colleagues argue that people have many ways of looking on the bright side, but forget this fact when contemplating a potential loss. People know how to cope with defeat. They build up their ego automatically and unconsciously. These psychological processes happen so quickly that we don't realize we have these coping abilities until we need them. People are inaccurate in their expectations regarding a loss because people do not remember similar losses in the past. They do not accurately remember how they felt and wrongly assume they felt worse than they actually did. What is the solution? The solution may be obvious to seasoned traders: Make a bunch of losses, and repeatedly experience how you cope with them. Once you see how well you can cope with losses, you will tend to be less averse to losses in the future.
Perhaps one of the biggest reasons that losses are hard to handle is that losing money is not socially accepted. If you told your frugal parents, for example, (who were unfamiliar with trading) that you had lost $20,000 last month, they would treat it like a tragedy. It may not be a great feeling to lose such a large amount, but as most traders know, losses are commonplace and you must take them in stride and move on to the next trade to make profits in the long run. It is easy to put yourself in a fearful, pessimistic state of mind by allowing conventional social standards about losing money to make you feel awful. But with the proper mindset, you can cope with losses and the prospect of losing money. First, remember that losses are just an everyday fact of life when trading the markets, and that losing is not morally wrong. Second, remember the times you have lost in the past but survived to trade earnestly and make huge profits. When you are stunned and paralyzed from the prospect of losing, remember that the prospect of losing is much worse than reality.
posted by nomadhunter at 6:35 PM
0 Comments:
Post a Comment
<< Home