Gains and Losses

Let’s say that on a particular day, you are in a calm state of mind. Neither too happy, nor sad. Suddenly you are notified that you have been selected for an award of Rs. 10,000. The award is genuine, there are no hidden costs, and you didn’t have to pay anything for this. At once you are elated. The prospect of this cash makes you happy, and your state of mind is lifted.

After a while, you are notified that there was some error, and you will not be given the Rs 10,000 after all.  (Does this scenario seem too hypothetical?) What happens now? You will become unhappy. Will you return to your previous state of mind? Probably not. You will become less happier than you were before you came to know of the cash. You somehow feel the cash belonged to you, and you lost it.

What’s happening here? Why should you feel less happier than before, given that you have ended up in the same spot that you were? One explanation is that we give more importance to losses than to gains. Losses of a given magnitude affect us more negatively than gains of the same magnitude affect us positively. We are more tuned to losses. Probably from an evolutionary point of view, preventing losses was more important than securing gains. To this end, we are wired in favour of losses than gains. We remember negative events more than positive events. We focus more on the negative aspects of anything, as compared to the positive. As the popular saying goes, bad news travels faster than good news.

To mitigate this to some extent, it is better to take a longer term view of things. Take the stock market for example. The stocks and the overall index are bound to rise and fall several times in a day and in a week. A person who watches the market everyday is bound to worry about it more, and be more adversely affected by it, than say one who watches it only once a month, or once a year. Let’s say in a given year the stock market rises and falls sharply several times, returning to the same value at the end of the year. The everyday watcher will by now have had several sleepless nights, and corresponding rises and falls in personal happiness and stress levels, in tune with the market. (Now compare this with the hypothetical scenario above.) The effects of the rise is prices will not be sufficient to offset those of the fall though. Only one who comes back after a year to look at the market again can calmly say – “Nothing much happened this year.”

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