The Psychology of Money 185given periodic performance measured in f ive-year time periods. Thaler
then asked each group to allocate their portfolio for the next forty years.
The group that had been bombarded by lots of information, some of
which inevitably pointed to losses, allocated only 40 percent of its
money to the stock market; the group that received only periodic infor-
mation allocated almost 70 percent of its portfolio to stocks. Thaler,
who lectures each year at the Behavioral Conference sponsored by the
National Bureau of Economic Research and the John F. Kennedy School
of Government at Harvard, told the group, “My advice to you is to in-
vest in equities and then don’t open the mail.”^11
This experiment, as well as others, neatly underscores Thaler’s no-
tion of investor myopia—shortsightedness leading to foolish decisions.
Part of the reason myopia provokes such an irrational response is an-
other bit of psychology: our innate desire to avoid loss.
Loss Aversion
According to behaviorists, the pain of a loss is far greater than the enjoy-
ment of a gain. Many experiments, by Thaler and others, have demon-
strated that people need twice as much positive to overcome a negative.
On a 50/50 bet, with precisely even odds, most people will not risk any-
thing unless the potential gain is twice as high as the potential loss.
This is known as asymmetrical loss aversion:The downside has
a greater impact than the upside, and it is a fundamental aspect of
human psychology. Applied to the stock market, it means that investors
feel twice as bad about losing money as they feel good about picking
a winner.
This aversion to loss makes investors unduly conservative, at great
cost. We all want to believe we made good decisions, so we hold onto
bad choices far too long in the vague hope that things will turn around.
By not selling our losers, we never have to confront our failures. But if
you don’t sell a mistake, you are potentially giving up a gain that you
could earn by reinvesting smartly.
Mental Accounting
A f inal aspect of behavioral f inance that deserves our attention is what
psychologists have come to call mental accounting.It refers to our habit
of shifting our perspective on money as surrounding circumstances