If people were purely logical, the pleasure associated with an investing gain and the pain associated with an investing loss would be equally intense, assuming the size of the sums were the same. Simply put, the satisfaction of a $1,000 gain would be as intense as the pain associated with a $1,000 loss. But is this true? Is the pleasure associated with an investing gain as intense as the pain accompanying a loss?
Researchers have determined that the pain associated with an investing loss is experienced with almost two and one half times the intensity of the pleasure associated with a gain of the same magnitude. When investing losses are substantial, we may react with anxiety, stress, anger, or sadness. In extreme cases, investing losses have caused suicides and homicides. In 1999, Mark Barton, an Atlanta day trader killed 13 people in a murder/suicide spree in reaction to reportedly losing $105,000 over a 15-day period. Media reports indicated that Barton was a reasonably well-to-do chemist making $85,000 annually at the time of his death. Apparently, his bizarre behavior occurred under the pressure of a difficult divorce and mounting financial losses. A suicide note referred vaguely to “the people that greedily sought my destruction.”
In April 1999, day trader John Nyquist attempted to kill his wife in order to prevent her from discovering that he had lost nearly $800,000 of their combined assets, including his wife’s retirement account. Mrs. Nyquist survived and brought suit against the brokerage company that her husband used when trading, alleging that the company failed to provide adequate oversight.
For most people, investing losses do not result in clinical conditions such as major depression or impulse control disorders. However, the practical and emotional consequences of investing losses often leave significant pain and regret. How can we mitigate the consequences of an investing loss? Below I offer 7 practical and emotional tips.
Practical and Emotional Tips for Coping with the Pain of Investing Losses
1. View the performance of your portfolio in its entirety rather than focusing on the negative performance of a single investment. As long as the overall performance matches long-term average market returns, the loss will have little practical impact over time.
2. Seek the services of a qualified investing advisor to help you realistically appraise the impact of the loss on your long-term financial well-being. You should always contact a qualified investing professional before making any investing decision.
3. Recognize our tendency to experience losses emotionally as over twice as painful as the pleasure associated with similar size gains.
4. Recognize that “the pain of regret” is a very common experience following an investing loss and may be disproportionate to the actual magnitude of the loss.
5. Avoid stock trading and other high risk investing endeavors.
6. Consider contacting a Financial Behavior Coach”, a Financial Behavior Consultant”, or some other professional who is specially trained to help you manage the emotional factors that impact money decisions. Don’t allow unrealistic optimism to cause you to trade stocks or engage in other high-risk investing behaviors.
7. If you experience significant anxiety, depression, or other powerful emotions following an investing loss, seek the services of a qualified mental health professional.