After my idiot moment last night, where I lost half my bank, I started wondering what is it that makes these things happen. Why did I let my loss run, whereas when I was making a profit, I would be inclined to take it there and then.
I remembered something I had read in a pretty cool book about persuasion and influence (something I have a fascination about), called "The Science of Influence" by Kevin Hogan (pictured below). The book asked a couple of questions that researchers Kahneman, Slovic and Tversky had posed in 1982. Have a go at them:
Situation A:
In a game you receive $1,000 (cool game!). In addition, you have a choice between a certain gain of $500 or a 50 percent chance of winning an additional £1,000 and a 50 percent chance of winning nothing.
Which do you choose?
Situation B:
In a game you receive $2,000. In addition, you have a choice between a certain loss of $500 or a 50 percent risk of losing $1,000 and a 50 percent chance of losing nothing.
Which do you choose?
Hopefully you have made your choices. If not, then re-read the above questions and note down your answers.
-- Don't read on until you have your answers --
Okay, well, basically, both situations are the same but are framed differently (i.e. same meaning but differently directed wording).
In both situations you are deciding whether you want £1,500 guaranteed or a 50 percent chance to end up with either £1,000 or £2,000.
How do most people respond?
In situation A, they found that 84 percent of people chose the certain $1,500 (first option). Only 16 percent of people were willing to gamble on the 50-50 chance of either ending on $1,000 or $2,000.
In situation B, they found that 31 percent chose the certain $1,500 (first option). A huge 69 percent were now willing to gamble of the 50-50 chance of ending up with either $1,000 or $2,000.
The situations are 100% identical yet how they are presented makes all the difference and gives us an indication on how people make decisions.
The lesson: People will lock in a sure gain in favour of any risk in the future, but they will let their losses run.
It is a lesson I hope I have learnt now and in the future can use discipline and make sure I cut my losses and live to fight another day.
I remembered something I had read in a pretty cool book about persuasion and influence (something I have a fascination about), called "The Science of Influence" by Kevin Hogan (pictured below). The book asked a couple of questions that researchers Kahneman, Slovic and Tversky had posed in 1982. Have a go at them:
Situation A:
In a game you receive $1,000 (cool game!). In addition, you have a choice between a certain gain of $500 or a 50 percent chance of winning an additional £1,000 and a 50 percent chance of winning nothing.
Which do you choose?
Situation B:
In a game you receive $2,000. In addition, you have a choice between a certain loss of $500 or a 50 percent risk of losing $1,000 and a 50 percent chance of losing nothing.
Which do you choose?
Hopefully you have made your choices. If not, then re-read the above questions and note down your answers.
-- Don't read on until you have your answers --
Okay, well, basically, both situations are the same but are framed differently (i.e. same meaning but differently directed wording).
In both situations you are deciding whether you want £1,500 guaranteed or a 50 percent chance to end up with either £1,000 or £2,000.
How do most people respond?
In situation A, they found that 84 percent of people chose the certain $1,500 (first option). Only 16 percent of people were willing to gamble on the 50-50 chance of either ending on $1,000 or $2,000.
In situation B, they found that 31 percent chose the certain $1,500 (first option). A huge 69 percent were now willing to gamble of the 50-50 chance of ending up with either $1,000 or $2,000.
The situations are 100% identical yet how they are presented makes all the difference and gives us an indication on how people make decisions.
The lesson: People will lock in a sure gain in favour of any risk in the future, but they will let their losses run.
It is a lesson I hope I have learnt now and in the future can use discipline and make sure I cut my losses and live to fight another day.
"How to Stop Losing and Start Profiting"
No comments:
Post a Comment