Question

4. Explain asymmetric loss aversions and how it impacts financial decisions.

Answer 1

Ans. Loss aversion refers to tendency for people to strongly prefer avoiding losses than acquiring gains. For some people, losing a $100 is not same as gaining $100. People for whom losing a $100 is same as gaining a $100 are symmetrical. People found experience a loss two times greater than an equal gain, discovered the experience as asymmetrical losses and are known as asymmetric loss aversions.

Asymmetric loss aversions makes an investor stagnant. Investors are resistant in bringing any change in their portfolio and remain where they are. This is caused by loss aversion. They do not want to take risk and let go of what they have and lose it, even though they are giving up on the opportunity to earn more. For loss aversed people, gaining more has less relevance than losing more. Due to this they keep holding on to their losing stocks for too long.

Loss aversions ends up either in stagnancy or in more losses and hence impact the financial decision of an investor.