While putting together some data for a comparable against the Vue, I thought I would take this time to refresh my memory of some of the psychology that will accompany this upcoming decision. Known as cognitive biases, there seem to be several that I am battling with. Today, I’ll mention one, and that is loss aversion. Simply stated, according to this theory, humans value avoiding loss moreso than achieving gains. The emotional pain of losing a dollar is twice as much as the joy of gaining one. In the stock market, because we don’t sell at a loss when a stock goes down, we hold on in the irrational belief that some day it might become profitable, missing other more profitable opportunities. This is in direct violation to the saying…”cut your losses and let your profits run.”
I know deep in my heart that the price I paid for my unit of the Vue has gone down. And I know it has gone down a lot. Of course I want to believe those who say they my unit will appraise at the price I paid and that I haven’t lost anything. In fact, look at the current price sheet…”I’ve gained!” Wow, amazing, the economy has collapsed, no one can sell their homes, there are 9.5% unemployed, Charlotte job growth has disappeared, and I have made a huge paper profit if I will only close on my unit! And never mind the risks involved if I do close, the best part of all is at least I won’t have to feel the excruciating emotional pain of taking a large loss (at least right away) and feeling like an idiot for ever getting involved in this investment! As I try and keep my head clear, I am acutely aware of loss adversion and other psychological flaws of human nature that come into play when making financial decisions. We’ll talk about some other cognitive biases in future posts. If you have one you feel you are battling, please share it in the comments!