As the name implies, loss aversion is our instinct to not just prefer a gain over a loss but to prioritize avoiding losses over almost anything. It might sound wise to try avoiding losses but taking it too far could keep you from realizing your financial goals.
Loss aversion is a cognitive bias that studies have proven over and over again. But that fear, when applied to buying and selling investments or strategizing for long-term financial goals, can hold you back. The unwillingness to part with something for less than you paid for it can keep you clinging to declining investments, even selling a “winning” stock to avoid selling another at a loss. It could also make you hesitant to tackle more emotional planning challenges like continuity planning for a family business.
Here are some steps for overcoming the fear of letting go.
While it’s natural and often prudent to try to avoid loss, letting that fear loom too large over your financial decisions could actually lead to the very thing you’re afraid of. That’s why counteracting loss aversion by cultivating a healthy relationship with risk could be the key to gaining in the long term.
Next steps:
If you think your loss aversion is affecting your financial goals, consider taking action with these suggested next steps. First, set long-term financial goals that will encourage you to see the bigger picture if you are facing short-term losses. Then, speak to your advisor about the moves you’re thinking about making before taking any immediate action.
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