Imagine the following scenario:
You can either pocket a guaranteed $500, or flip a coin. If you get heads, you get $1,000. If you get tails, you get nothing.
Now, imagine this second scenario:
You are given $1,000 — woohoo! But you have to decide whether you’ll lose $500 of it outright, or flip a coin. If you get heads, you lose nothing. If you get tails, you lose $750.
Chances are, in scenario one, you chose to pocket the money, whereas in scenario two, you chose to flip the coin.
How did you know that!?
That’s because we feel the pain of losing money so much more than we feel the joy of earning a reward. This trend is called “loss aversion,” but, in everyday terms, you might find it a bit familiar to FOMO: the fear of missing out.
FOMO tends to describe the pain of seeing your friends on social media doing fun things and achieving their goals while you’re left out. In a way, loss aversion is similar because you’re afraid to lose out, but the pain might be a bit deeper with money.
It might sound ludicrous that we hurt more when we lose money than we feel joy in earning it. But studies have shown we feel the heartbreak of a financial loss twice as strongly as we feel gaining the same amount of money. So, if you get a $500 bonus from your boss, you’ll only be half as emotional as you would be losing that same amount on the stock market.
How might this affect me?
Loss aversion can be both good and bad. For starters, it might lead you to make “safe,” low-risk investments. This turns out to be helpful for investments you have to make, such…