Tuesday, April 24, 2012

Remember The Bad

A fascinating article in the NY Times describes why we experience loss aversion, a tendency that appears to play a large role in how prices move in the market.

For one thing, we remember bad experiences more than we do good ones. This may condition us to avoid situations where we fear we may experience a negative emotion, even if that negative feeling is temporary, and even if the overall experience would be positive in the long-term.

Apparently, it's not just humans that exhibit this tendency, as experiments suggest that rats do as well! This has led some to believe there is an evolutionary basis for loss aversion, as those more attuned to immediate threats would have survived and passed these genes on.

Interestingly, we also tend to believe that those who are negative are smarter! And when we believe we are talking to smarter people, we tend to speak (and perhaps think?) more negatively.

The intriguing article is available here.

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