Of all the findings in behavioral science, the most significant may be "loss aversion," the idea that people dislike losses a lot more than they like equivalent gains. Loss aversion can create big trouble for businesses and investors. And it can badly confuse political debate — as it seems to be doing in the current discussions of the nuclear deal with Iran. (Disclosure: My wife, Samantha Power, is the U.S. ambassador to the United Nations.)
Here is a simple demonstration of the power of loss aversion: When a store offers shoppers a five-cent bonus for bringing their own bags, they still don't bother. But when the store charges five cents for each plastic bag it distributes, shoppers use a lot fewer of them. The prospect of loss concentrates the mind.
Loss aversion makes many people reluctant to invest in equities, because they don't want to risk losing some of their principal — even if "buy and hold" is the winning strategy over the long term. And when investors assess their portfolios, loss aversion often causes them to stick, unwisely, with stocks that have lost value — while selling those that have gained. (Even professional money managers demonstrate this kind of loss aversion.)
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