Many experiments have demonstrated that people need twice as much positive to overcome a negative.
On a 50/50 bet, with precisely even odds, most people will not risk anything unless the potential gain is twice as high as the potential loss.
This is known as asymmetric loss aversion: the downside has a greater impact than the upside.
This is a fundamental bit of human psychology.
Applied to the stock market
It means that investors feel twice as bad about losing money as they feel good about picking a winner.
This line of reasoning can be found in macroeconomic theory, which points out that:
- during boom times, consumers typically increase their purchases by an extra three-and-half cents for every dollar of wealth creation, and
- during economic slides, consumers will actually reduce their spending by almost twice that amount (six cents) for every dollar lost in the market.