Gains and Losses

Consider this scenario: 600 people were infected with a deadly disease and there are 2 options that you can make. If you choose option A, you are guaranteed to be able to save 200 lives. If you choose option B, you will have a 1/3 chance to save all 600 lives and 2/3 chance that you will save none. Which choice will you make? A survey done found out that 72% of respondents choose option A.

Now consider the same scenario again with different options: Again 600 people were infected. If you choose option A, 400 people are guaranteed to die. If you choose option B, you will have a 1/3 chance to save all 600 lives and 2/3 chance that you will save none. Which choice will you make? A survey done found out that 78% of respondents choose option B this time.

You will realized that in both the scenario, option A’s actual outcome is no different (200 live means 400 die, 400 die means 200 live). However, due to the psychological difference between gains and losses, people make different choices.

In reality, in a similar fashion, people are more willing to take a chance with losses than not gains. That is why when stock prices rise, many investors will choose to sell and take profit. And when the stock prices fall, and money is lost, many investors will not be able to accept and deal with the losses, hence choosing to hold out and take the chance that the price will someday rebound.

As compared to the times when you gain; when face with loss, investors will subconsciously become more willing to take a gamble. This mentality in many cases will cause the investors to be too late to stop loss and result in even greater losses.

Therefore in all aspects of life, not only in investments, we should always warn and remind ourselves of the subconscious mistakes that we may make before we embark on any action or activity.

Life is just your perception of it.


P.S: It is an innate instinct in life to protect ourselves