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Originally Posted by LOL!
This article http://www.newyorker.com/fact/conten.../060918fa_fact
by John Cassidy in the New Yorker was mentioned in the NYTimes.
It mentions several behavioral finance studies and discusses the emerging field of neuroeconomics.
Those reading the pay off mortgage vs invest thread might find it enjoyable. Those still holding stocks with a net loss, may be stimulated to take action. |
The article talks a lot about the fact that people are risk averse, i.e., they will not take a bet that gives you a fifty fifty chance to win $2 versus lose $1 and less and less likely to take the bet if the stakes go higher. They and other researchers find that behavior strange or even irrational since the odds favor a gain. But the article answers its own question when they point out later that people become much less risk averse if they are presented continuing "bets," like setting up a portfolio or being presented with a series of +2 vs -1 bets.
But the choice may be a very sensible, if unconscious, tendency of humans to protect their interests. Often times a limited lose will be correctly perceived as having a strong negative impact - e.g. you have to give up ER and return to work. A gain of twice that amount has a positive impact but not nearly as dramatic - you can save some money, take some trips... but so what, you were happy as it was - no great gain.
Given the same choice but repeated many times and the liklihood of substantial loss over the long haul becomes deminimus so we take the bet. Seems sensible to me.
Linear Mode
