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Loss aversion

 


People always tend to put their money in safe investment brackets like bank accounts, FDs, etc. They always feel safe with those investments. This phenomenon is called loss aversion. As per Investopedia, "Loss aversion in behavioral economics refers to a phenomenon where a real or potential loss is perceived by individuals as psychologically or emotionally more severe than an equivalent gain. For instance, the pain of losing $100 is often far greater than the joy gained in finding the same amount.


Let me give one example of how this phenomenon works in real life. a man who wants to earn twice as much as an FD (roughly 10-12%) Put 1 lakh RS. in three stocks for the next two years. One stock doubled within two years and the other two have generated minus 20% returns over the next two years. Overall returns should be around 10% CAGR over 3 lakh RS. But the pain of two investments that don't provide any returns over two years is much more than two stocks that double within a short period of time.


In these two years, you should take 15 minutes per day to learn how investments work, read old books, get ideas from people who have more than two-three decades of experience, and much more. In the real world of knowledge, this is how compounding works.


To summarize, people who do not take risks are taking significant risks in their lives. if someone doesn't have the knowledge to invest their money, invest in knowledge. The most valuable investment you can make in yourself.

Nassim Taleb - 3 Cognitive Biases That are Making You Poor and Unhealthy + How To Overcome Them

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