Mastering Loss Aversion: How Understanding This Cognitive Bias Can Improve Your Investment and Business Strategy

Have you ever stuck onto a losing investment, expecting it would recover, only to see it fall further? Or have you been hesitant to transfer service providers due to fear of the unknown, even when better options were available? If this is the case, you may be suffering from loss aversion.

Image created by the author.

Imagine you made the decision to invest in equities around a year ago. You started by researching many organizations from various industries, examining their financials and future prospects. You determined that a fertilizer company’s stock, which was priced at $100, had a bright future and that its share price would climb. The company got government-subsidized gas, faced minimal competition, and import limitations on fertilizers were enacted to keep local prices stable — all while domestic and worldwide demand remained strong.

Based on this study, you decided to invest your money by purchasing stock in the company. Over time, the stock price rose to $150. Then, without unexpectedly, it fell, recently plunging to $50 — half the price at which you invested.