How certain hooks in your mind stop you from thinking beyond the present

In certain situations, our mind plays games with us minimizing our ability to think beyond the present and make rational decisions.

You can’t bet your fortune at 50% probability of winning. It’s plainly considered stupid. In fact, betting your fortune, even when 2/3rds of the odds are in your favor is also not wise.

This bias is known as loss aversion where we weigh our potential losses differently from our potential gains. While this bias is not entirely bad to have as it saves us from unnecessarily losing our hard earned possessions, having too much of it will almost always not work in your favor.

We have this conversation almost daily with a lot of investors who have some of their investments in the red and are still not willing to sell it in spite of knowing that there is hardly anything in the company that will push the prices back up.

It feels as if they're taking revenge from that particular stock and will to hold it until it comes back in green. With some investors, this has gone to the next level where they keep averaging (buying at lower prices and bringing the overall cost of their investments down).

You can argue that buying at a lower price is better because you are getting the same opportunity at a cheaper price but that is only right when you know that something is intrinsically good about the company that the market has not yet noticed. You can’t just buy on the basis of the fact that after you bought the stock, the prices have gone down.

The holistic picture

We have noticed a common thought process among these investors that they are focusing too much on 'right now' and not really iterating on other future possibilities. Most of them have got their Eureka moments in realizing this bias when we told them about the following two problems:

1. The mathematical problem.

Simple mathematics tells us that when something goes 50% down, it has to come up by 100% from that point just to breakeven. And we are not even talking about profit till this point.

2. The opportunity problem.

With some real examples, we show them what would have happened to their overall investments had they sold their loss-making investments at a loss and invested those proceeds in another stock with a better potential.

Just the realisation of this bias will make you win half the battle. Once you know that you’re susceptible to this, you will start identifying it and think differently to take conscious decisions.