Prospect Theory

Prospect Theory explains why losses hurt twice as badly as comparable gains feel good, which is why we sometimes may overact to short-term portfolio losses. Consider the example of two couples, the Folgers and the Rogers, who have the same amount of money invested over the same time period producing the same results. The Folgers are thrilled with the portfolio while the Rogers are miserable. What’s the difference? It could be how frequently the couples look at their statements.

Prospect Theory

As part of our "Training the Investor Brain" presentation and materials, we discuss Prospect Theory, which says losses hurt twice as much as comparable gains feel good. So if we lose $1,000 in the stock market, but eventually gain that $1,000 back, we are even. But we may not FEEL like we’re even. We still may FEEL like we lost money.

Wheel of Investor Emotion

Do you find yourself constantly checking your portfolio returns and perhaps losing sleep during inevitable down markets?

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