Currently reading this book, I thought this was a great summary of loss aversion.
Librarian "If we can only gain from a situation, we avoid risk, but when we feel threatened or are in really deep trouble, we fight a lot harder and take larger risks. No one is as dangerous as the opponent who fights for his survival. It is like the story about the rabbit and the fox. Why does a rabbit run faster than a fox?"
Seeker "You tell me."
Librarian "Aesop said, 'The rabbit runs faster than the fox, because the rabbit is running for his life while the fox is only running for his dinner.' Any many studies of animals show that 'defenders of a territory almost invariably overcome intruders of the same species who try to take over their territory. Residents who face the risk of losing their territory exert more effort than challengers who try to gain new territory.'"
"As Baltasar Gracián said, 'Never contend with a man who has nothing to lose.' Or someone who has everything to lose. So you can imagine what happens in a negotiation where one party can only gain and the other one has everything to lose. Or when both parties face losses."
Seeker "It increases the chance of conflict. If I had faced a choice between losing for sure and 'surviving by fighting' -- even if the chance was minuscule -- I pick the fight."
Librarian "Then you can understand how difficult it is to reach some agreement in cases where both parties have to give up something or make a concession to get something else. We'd rather take a conflict than make a concession."
Seeker "Let me have a try on concessions -- getting one feels like a gain but giving one feels like a loss. And since we hate losses more than we like equal gains it will be tough to reach a 'fair' agreement since both parties see it as unfair."
Librarian "Yes, and our loss aversion explains why we always undervalue what we get relative to what we give."
"Instead, try to see things from your counterparty's point of view and don't mind [making] concessions on minor matters if that more easily leads to the more important matters settled to your advantage. Only take a firm stand on really important things."
Trading is often about how to take the appropriate risk without exposing yourself to very human flaws.
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That's my problem. I had 2 trades tonight where the price went well against me and I re-entered a number of times. On the first one the price soared back in my direction as quick as it had gone against me, and I made a point. The second one kept going in the same direction and I lost 3. I like a good fight, but I need to learn to pick my fights better. very volatile markets tonight
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