The psychology of investing is a life’s work, worthy of its own PhD program. We all have demons in our minds, and taming the demons can be hard, but is a worthy cause. Those demons can cause us innumerable sleepless nights, and for the most part, self-damaging responses. In many ways, we are our own worst enemy.
One of the leading psychologists on the investor’s mindset is a man named Daniel Kahneman. He won the Nobel Prize in Economics in 2002. Human irrationality is his life’s work and the theme of his theories. He has written many books on the topic, but one of his more important achievements revolves around his findings about how we experience the emotion of financial loss and gain. He concluded that people experience the emotion of a loss three times more acutely than the pleasure of an equal gain. So if I were to ask if your $10,000 and my $10,000 were of equal value you would probably say yes. Yet, my response would be that it depends on who had it first. From an emotional standpoint, my $10,000 is really only worth $3,000 if you are taking it from me. But your $10,000 is worth $30,000 if I’m taking it from you; at least in your mind. This gives investors an emotional stake of ten to one in seeking to avoid loss as opposed to seeking gain, with the same money at stake. Humans were also never designed as battle beings. We are too smart. We tend to run, hide, or climb a tree.