As co-founder of Chappell, Mayfield & Associates, Cass offers expertise in financial planning, wealth accumulation, retirement planning, insurance planning, business continuation planning, and employee benefits. Cass launched his financial planning career as an agent for Prudential Financial in 1996, and later, a manager in the company's financial services division. Since then, Cass has earned the CFP®, CLU, and ChFC designations, reflecting his commitment to excellence in investment decision-making and financial planning. He also holds a B.S. in Management from Georgia Tech. Cass has lived in Atlanta since 1992. He is married to Alison, and has a daughter. More of his blogs can be found at http://atlantaplanningguys.com/?author=1
The last two years have exposed a lifetime of emotions for most investors. Plummeting markets brought fear. Those who held the course were rewarded with a strong, rapid recovery bringing a sense of euphoria and pride with the wise decision not to sell everything and “stick it under the mattress”.
The 1979 Tversky and Kahneman study* illustrates the impact that aversion to loss has on people’s financial decision-making. An experiment:
One group of participants was given $1000 AND asked to choose between:
- A sure gain of an additional $500
- A 50% chance to gain an additional $1000 and a 50% chance to gain nothing
A second group was given $2000 AND asked to choose between:
- A sure loss of $500
- A 50% chance to lose $1000 and a 50% chance to lose nothing
The results of either choice posed to the two groups are identical: in choice A, both sets of participants end up with $1500 and in choice B, both sets of participants end up with either $2000 or $1000.
Here is where the behavior of humans enters………
- 84% in the first group selected the known gain (option A) rather than risk a loss (option B)
- 69% in the second group chose option B, indicating that they were willing to assume the greater risk of losing $1000 rather than face the certain loss of $500
The key findings of “Prospect Theory” were that:
- Prospective losses bother investors much more than prospective gains please them
- Choices people make are based on their subjective version of the situation, not on an objective reality
* Source: Lightbulb Press, An Advisor’s Guide to Behavioral Finance, 2008
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