“If there is a 50-50 chance that something will go wrong, then 9 times out of ten it will.”
Paul Harvey, Journalist
If someone approaches you with a bet of USD 100 at a flip of a coin – if you win you get 100 and if you lose you pay 100, then you are not going to take it. Whether it takes increasing your winning option to 150 or 250 depends on your specific risk appetite, but on average you need twice as much back as you have in risk. Twice!
Daniel Kahneman – the nobel price winner and author of Thinking Fast & Slow – calls this the most significant contribution of psychology to behavioural economics. The applications in all business, negotiations and not least stock trading cannot be overestimated – any place there is anything less than perfect information on both sides of a deal, there will be manipulation (consciously or not).
Here is Dan Ariely – one of the most popular authors and professors in behavioural economics – giving you some really sharp pointers and tricks on loss aversion:
If you enjoyed this you will love next time, where your own emotional bias will be tested if you dare… And if you have too much of an appetite, then contact me at firstname.lastname@example.org or +45-23103206.