Pleasure and Pain
Several years ago I read an article that used research to show how the brain reacts to gain and loss. It seems the amount of pleasure we receive from a gain of say $1000 is not equal to the amount of sadness we feel about a loss of the same amount. Our capacity for regret seems to outpace our capacity for happiness.
The article went on to show the applications for investing. Some people will hang on to a losing investment out of “loss aversion” and hope it will somehow come back to the level at which they bought it. It’s easy to think the stock remembers your purchase price and is working to get there again so you can sell. Unfortunately equities do not have memories. Others will sell a stock too soon that has gained value because they want to feel the concrete but momentary pleasure of making a bit of money and as well avoid the risk of somehow losing their profit.
Training yourself to take the loss in order to invest in something that has potential for gain seems to be going against a hard-wired bias. We have a hard time accepting the pain of the loss and focusing on potential rewards of a future gain. The best investors I know understand the value of limiting loss and focusing their full attention on new opportunities.
You are probably thinking I’m going to find some spiritual or moral lesson in this. Nope. I’ve just been watching my own emotions as well as those of people around me as they react to the substantial losses we have been experiencing over the last several weeks. Years of appreciation are being vaporized in a few days.
Some are giving in to panic.
Some are licking their chops (that may be a little overstated) thinking about buying opportunities.
Some are totally immobilized or angry or looking for someone (Obama, Bernanke, Greece, or Geithner) to blame.
Some have gone to bed “rich” and awakened to a market that has moved them suddenly to “not rich” and that’s a tough pill to swallow.
Some are wishing they would have given away more and secretly thinking God might have limited their losses as a result.
Others are just dealing with it and trying not to let their paper losses do any more damage to their sense of values than the paper gains did to their identity. Neither gain nor loss has changed them. It’s not fatalistic or naïve. Os Guinness used to say about the Puritans, “It is as if they had swallowed a gyroscope.” That’s what I want to feel more than mere happiness or the impossible avoidance of loss.