Consider Your Loss Aversion Bias

Loss aversion is the preference we have to avoid losing $5 compared to gaining $5.  It’s logically the same value in this example but yet some studies have shown that we are twice as likely to favor avoiding the loss.  This effect plays out multiple different ways in our lives.  We tend to hold on to losing stocks to avoid taking the loss, we price anchor our houses and have a hard time accepting lower bids, we stay in bad relationships, we stick to secure jobs instead of following our dreams.

We should be conscious that we are ourselves under this bias with our own choices.  The truth is that perceived losses FEEL worse than reality. Actual losses are usually less dire than we imagine. Worst case scenarios are usually not as bad as we intuit.

The flip side of that coin is that potential gains are usually undervalued.  The prospect of making an extra $100 per month has LESS perceived value than its actual impact on your finances would be. The upside to a successful entrepreneurial venture are under appreciated by all but the most motivated entrepreneurs.

We are not great at logically assessing risk. Hence cold hard math can be a competitive advantage since it has a way to shine a light on our biases and accept facts.  When you find yourself contemplating taking a loss assume that your ability to come to the optimal solution is compromised and therefore the exercise of doing a more logical analysis is often beneficial.