The News

Are we being too SMART?
October 30, 2018

Do you ever find yourself sitting on the couch in front of the telly, thinking to yourself – is there ever any good news? Why does the media only focus on the bad? Why is a drop in the markets newsworthy, but a rise of the same amount only a byline? Why do hard luck stories travel faster & further than good? Why do we stay in bad jobs or maintain poor relationships for longer than is good for us? 

Behavioural Economists have proven that we are highly averse to loss. We feel the pain of losing something we have much greater than the benefit of gaining something we don’t. This behavioural effect is called Loss Aversion, and it permeates a lot of what we do. The media understands this, and feeds this back to us.

Why have we developed this asymmetric view towards losses versus gains? There is a very good evolutionary reason. For much of our evolution, we have relied upon our physical mobility. A broken leg can mean death on the Savanna, so we have learned to be cautious and to avoid danger. Simply put, to survive, we’ve had to be loss averse.

This trait drives a lot of irrational behaviour. We will hold on to shares showing a loss in the hope they will one day break even, when economists will tell us you should ignore sunk cost. We cling to the status quo even when we know that is making us unhappy. And we avoid setting goals – because the loss of not achieving them could weigh upon us much more than the reward from fulfilling them.

The message? We all know the benefit of setting goals. But be mindful of how your mind works, at a level you may not even be aware of. You know setting goals is good for you and can bring great success, but this also sets up the risk of a loss… and this is sometimes enough to stop us. We are reluctant to set goals as a consequence.

We all understand setting goals is good in theory, but we have evolved to avoid setting them, and the bigger they are, the more afraid we are of not attaining them.

When setting Goals, we need to be aware of our tendency towards loss aversion. That leads on to a discussion on developing a good relationship with failure. Sometimes we have to push ourselves to embrace Goals that we may not achieve – and that’s ok.