Myopic Loss Aversion

Posted May 25th, 2012

The avoidance of short term losses at the expense of long term gains. This phrase, out of the huge lexicon used in the world of finance, really piques my interest. It encapsulates our short sightedness in todays quick fix society. Indeed, the word myopic is a medical word used to describe short sightedness.

There are many situations where any of us, consciously or not, display this aversion to losing out in the short term, despite the long term ramifications. Does this describe you? You know who you are.

The phrase, if you google it, is a financial term. However, it translates with ease in to the structure of our everyday lives. Losing out in the short term is not necessarily a bad thing. It can teach us resolve and patience. Particularly when that initial perceived loss is more than balanced out with long term gain.

If you have a large sum of money to invest, in a manner of speaking, once invested, the money is gone. Short term loss. It could be tied up in bonds or an account where in order to make gain, the capital cannot be touched for a certain time period. If you are one that avoids short term loss at whatever cost, you may find that there is little long term gain to be achieved.

Self-Portrait 3/12

None of us can really predict the future. But we balance out our lack of foresight by placing safety nets all around us. A motorcyclist, for example, can be quite sure that he won’t have an accident on a commute to work. However, he wears a crash helmet and protective leather clothing anyway. He is not trying to predict a future where he comes off his motor bike. He may be quite sure that he won’t. But he is still safe guarding against that possible outcome.

There is difference between safe guarding what is necessary right in the here and now, and losing a little to gain a lot later. Often it requires diligence and patience. We may ask ourselves “why can’t I be more patient?” or “why can’t I do the right thing?” Often, the answers are right at our feet. If you wish to have more patience it may because you’re in a situation that demands it. Therefore, you have an opportunity to learn patience. If you’re struggling to “do the right thing” it is often because, doing the right thing may be the harder option which is precisely why you feel reticent. This engenders wisdom. Intelligence on its own never wins the day. Wisdom is putting in to play that intelligence (along with a smattering of compassion) to make the best decision for your life and that of your loved ones.

Short term losses are part of life unfortunately. However, with adequate financial planning it is possible to spot the potential for these and either take action or be aware of these in the context of longer term gain.

My approach is to understand you, your needs and your risk tolerance, so we can fully understand what level of risk you can take (and afford to take!).

From this position I am able to advise you on an investment solutions which will provide the return you need whilst minimising the potential for loss. It is evidence based and sustainable.

Why not get in touch to find out how such an approach could work for you.

Image credit/Flickr Paul Stephenson

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