Wednesday, October 10, 2007
Of pain aversion and life
There is one definite advantage of following the financial markets. You get to know learn more about life.
There is a concept in behavioral finance called "Pain aversion" or "Loss aversion" which indicates that human behaviour tends towards avoiding pain or loss. In the markets, this indicates the tendency to hold on to the losers and sell the winners.
How does this relate to life ? Well, if the choice is between getting up early and exercising on one hand, and sleeping a bit more on the other, you know what you choose. Similar is the choice between eating the fried snack loaded with fats and a fruit (which is healthy). Humans generally move towards short term pleasures or profits.
Of course, in the long term, the fundamentals do catch up, whether of the companies in the markets, or of your health due to junk food and lack of exercise.
Keynes might have said that "In the long run, we are all dead". But we should never lose its sight.
There is a concept in behavioral finance called "Pain aversion" or "Loss aversion" which indicates that human behaviour tends towards avoiding pain or loss. In the markets, this indicates the tendency to hold on to the losers and sell the winners.
How does this relate to life ? Well, if the choice is between getting up early and exercising on one hand, and sleeping a bit more on the other, you know what you choose. Similar is the choice between eating the fried snack loaded with fats and a fruit (which is healthy). Humans generally move towards short term pleasures or profits.
Of course, in the long term, the fundamentals do catch up, whether of the companies in the markets, or of your health due to junk food and lack of exercise.
Keynes might have said that "In the long run, we are all dead". But we should never lose its sight.
// posted by aditya @ 5:48 PM 
