Understanding Loss Aversion as a Hurdle in Successful Investment and Developing a Coffee Can Investing Approach to Overcome the Bias

Abstract

Loss aversion, an aspect of behavioral finance, is a bias that explains why people perceive the pain of losing a certain amount of money is double than the pleasure of gaining the equivalent amount of money. Loss aversion is widely used by insurance companies who trick you into buying insurance for an event that is likely not to happen. Since loss aversion makes a person overestimate their losses, people who exhibit more loss averse behavior tends to miss out on various profitable investment opportunities as they are unable to take the required risks. In this study, the researcher’s aim is to first establish the presence of loss aversion among various college going students and then work out on different methods (such as framing) on how this bias can be minimized and help an individual remove this obstacle and be another step closer towards successful investment. Though loss averse behavior can be seen in every individual to a certain extent, a person who is extremely loss averse may suffer from making day to day decisions and even personal financing would be a herculean task for the said person. The study then looks into the concept of Coffee Can Investing and how it can play a vital role in diminishing the effects of Loss Aversion. Coffee Can Investing comes under the category of value investing wherein companies are identified which have consistently outperformed the index and delivered astonishing returns to the shareholders.