by Investors hate the thought of losing money even when the odds are in their favor. I often teach retirement classes at the 92Y in New York City. To spice things up I begin with some entertainment. I take a coin out of my pocket and I tell the class;
I’m going to flip a coin. Whoever wants to play raise your hand. If you call it correct I will pay you $500. However if you are wrong you will pay me $100 who wants to play?
In a class of 30 how many do you think want to play? If you guessed hardly anyone you are right. The problem is that this makes no sense. You have to take a five to one bet with a 50% chance of winning.
The problem of course is that the fear of losing is much greater than the promise of winning. This simple revelation won Kandleman and Tversky a noble prize for economics in 2002.
The insurance industry knows all too well how to market the fear of loss. For example we can insure the unexpected loss of life with life insurance, or the mind with Long Term Care Insurance. And even though there is a greater risk of becoming disabled than dying prematurely, more people purchase life insurance than disability insurance.
It’s easy to be overly obsessed with under performing the market. However what good are stellar returns if they are taken away because of a permanent disability.
Food for thought? As always your comments are appreciated.