March 17, 2009
You know that feeling you had when you received that last statement from your 401(k)? Maybe it was like you ate something bad at lunch or you felt a bit lightheaded. Losses like the ones we’re now all experiencing actually hurt, according to a new study from the Proceedings of the National Academy of Sciences, but there is something we can do about it: get some perspective.
When it comes to our finances, the majority of us are really just amateurs. When we lose money, the amount by which we feel worse is greater than the amount by which we feel better when we experience gains. This results in something called “loss aversion,” and we act accordingly; avoiding loss is more important to us than acquiring gains, so we avoid risk when making decisions.
In the new study, researchers examined this loss aversion behavior by subjecting participants to a game. Each person was given $30 and then had to make a series of decisions about their money. Depending on how they played, they could have won up to $572 or lost it all, but everyone came out somewhere in between. The researchers measured emotional arousal among their subjects and found that participants who were told to think like a trader putting together a portfolio experienced less emotional arousal than those who had been told to consider each choice in isolation. In other words, those who put some perspective on their losses weren’t nearly as bummed out by them.
The researchers note that experienced professionals, such as condominium investors, “show less apparent response to loss than less experienced agents.” Experience gives professionals a natural bit of perspective when they deal with loss. But that doesn’t mean we can’t give ourselves some as well. “We can change how we decide, and although we may be sensitive to losses, we can make ourselves less so,” the researchers write.
It’s something to think about when your next 401(k) statement arrives in the mail.
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