Is fear of losing derailing your investment plan?

IMAGINE this: You have a choice of getting $90 or taking a 90 per cent chance of winning $100. Which would you pick? Most people would avoid the gamble and take the certain $90, even though the expected utility is the same for both options.

However, if asked to choose between losing $90 or taking a 90 per cent chance of losing $100, you would probably choose the latter (90 per cent chance of losing $100), and engage in risk-seeking behaviour to avoid a loss. Again the expected utility of both choices is the same.

Psychologists Daniel Kahneman and Amos Tversky developed a behavioural model known as prospect theory in 1979, to explain how our cognitive biases affect us when we assess uncertainty and make decisions using the principles of loss aversion. We tend to feel the pain of losses more strongly than the pleasure of gains. In fact, Kahneman and Tversky's research suggests that we feel at least twice as upset about losing $100 than we feel happy if we found a $100 bill on the street.