Loss aversion can make you very careful when it comes to finances. However, the fear of risk could also be stopping you from seizing some truly savvy opportunities.
What is ‘loss aversion’?
Some people experience feelings associated with loss a lot more than they feel a benefit. This means they go out of their way to avoid losing what they have, even if it means missing out on a potential gain. In behavioural economics, we call this ‘loss aversion’.
How might loss aversion affect my savings?
When it comes to money, loss aversion can be a positive and a negative influence. Let’s take a look at some scenarios:
• Scenario 1: Your friends have started dabbling in stocks and shares, and they’re making a fair bit of pocket money. They offer to help you set up, but despite the potential gains, you’re too afraid of losing to risk the investment
• Scenario 2: You’ve been with your mobile supplier for years. Your partner decides to switch to a different network after seeing a good sign-up offer. You’d rather stick with what you know
• Scenario 3: Your bank offers you mobile banking to help make checking your balance easier. You download the app, but you still feel sick every time you open it. Even seeing the gas bill go out sparks a minor panic attack
How do I overcome loss aversion?
Your fear of loss isn’t always unfounded, but sometimes it’s worth considering if the benefits might be worth the risk. Here’s some things to consider to help overcome loss aversion:
• Ask yourself, will this help me out in the long-term? If the answer is yes, loss aversion could be getting in your way
• Be honest, what could actually go wrong? Would the loss you’re predicting really scupper your finances?
• Might it help to get some professional advice? Sometimes a little reassurance is all you need
• Are things perfect at the moment? Most likely not. So maybe a few changes are worth considering