Tuesday, June 19, 2007

Perceptions and Monetary Loss

Earlier, I had a random conversation with a few friends that led to questions about losing money and how it would make you feel. I think everyone had their own opinions, and I'm just curious what you all think.

Say we had the following two situations:

1) You invest $10K in some stock, and lose $1K.

2) You carry $10K in cash by grasping it in your fist, open to the world. Some unforeseen event causes you to lose $1K (e.g. strong gust of wind knocks you over and $1K in bills flies away, or some bum runs up beside you really quickly and manages to snatch away $1K).

Obviously both scenarios suck, because losing a thousand bucks isn't fun. But, the question is... Do you feel differently about how the money was lost in both situations? Bottom line is that at the end of the day, you are out $1K. But, do you dwell over one loss more than the other? Is it irrational to do so or not?

And, no, this has nothing to do with a real-life situation. Although, it does stink that NTAP jumped today while EBAY sank.


Rowr said...

in 2) you had no control about what happened to the money (other than being stupid and holding it in your hand) - it just got taken from you somehow. when you lost it, it wasn't as a risk, just loss. at least in 1) there is both a perception of control over the situation and a chance that you would have made money instead of losing it.

Never-Limp said...

I completely agree with rowr. At least you had a chance to make money in situation 1.

Brute Force said...

I pretty much agree with the two of you. Just that I heard it being argued the other way around where you had some control of #1, and a lot less control of #2. Like, it could be that you made a really ill-informed investment in #1.

Maybe more interesting, I guess, is whether or not viewing the two differently would be considered irrational at all. But, from the small sample of votes, it does seem pretty one-sided how people view the situations.