The Most Important Concept in Finance
He writes about what it was like to finally win his first Grand Slam tournament at Wimbledon. Everyone’s perception of Agassi changed from choke artist to the real deal.
But I don’t feel that Wimbledon has changed me. I feel, in fact, as if I’ve been let in on a dirty little secret: winning changes nothing. Now that I’ve won a slam, I know something that very few people on earth are permitted to know. A win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad. Not even close.
I’ve talked to my oldest daughter about this lesson many times. Over the past couple of years, she’s become a rabid sports fan.
No, Danny said, money lost isn’t the same as money gained. Losses are more than twice as painful as gains. He asked the conference attendees: If you’d lose $100 on a coin toss if it came up tails, how much would you have to win on heads before you’d take the bet? Most of us said $200 or more.
Kahneman’s loss aversion is perhaps the most important money concept of them all. Losses impact your money emotions in so many ways.
