Why does this matter? There’s solid evidence that experiencing such losses—noticing that our portfolio is losing money—leads to poor choices. In one lab experiment by Richard Thaler, Amos Tversky, Daniel Kahneman, and Alan Schwartz, subjects were far more likely to invest in a bond fund when feedback was given more frequently. Unfortunately, these low-risk bonds also generate lower returns over the long haul. As the scientists noted, “Providing such investors with frequent feedback about their outcomes is likely to encourage their worst tendencies…. More is not always better. The subjects with the most data did the worst in terms of money earned.” Such is the vicious circle of loss aversion, as our strong dislike of losses causes us to lose even more.
Excerpt from: The Smarter Screen: Surprising Ways to Influence and Improve Online Behavior by Shlomo Benartzi and Jonah Lehrer
