Loss Aversion Bias - Why People Feel Losses Twice as Heavily as Gains
According to Prospect Theory proposed by behavioral economists Daniel Kahneman and Amos Tversky, humans do not evaluate equal amounts of gains and losses symmetrically. The pain of losing 10,000 yen (about 100 USD) is felt at approximately 2 to 2.5 times the intensity of the joy of gaining 10,000 yen. This loss aversion bias has a serious impact on investment behavior. People hold onto stocks with unrealized losses thinking "it will come back eventually" while quickly selling stocks that show even a small profit wanting to "lock in the gains." This is the classic behavioral pattern that violates the principle of "cut losses short, let profits run."
To overcome this bias, it is effective to set trading rules in advance with specific numbers. For example, mechanically applying a rule such as "cut losses at 15% below purchase price, take partial profits at 30% above" enables decisions free from emotional influence. In fact, survey results show that investors who practice rule-based trading achieve annual returns averaging 2% to 3% higher than those who trade based on intuition.
Mental Accounting - The Psychology of Unconsciously Labeling Money
Mental accounting refers to the psychological tendency to assign different values to the same amount of money depending on how it was obtained or its intended use. For example, people spend 100,000 yen (about 1,000 USD) earned from salary cautiously, but spend 100,000 yen won from a lottery generously. Bonuses are allocated to luxury items as "extra income," while monthly salary is saved as "living expenses." Objectively, both are the same 100,000 yen, but they are mentally sorted into separate accounts.
In investing too, this can lead to casually putting money into high-risk products because it's "surplus funds," or being overly conservative because it's "education funds." There are also ways to leverage this psychology. By naming an investment account "remittance account to my future self," psychological resistance to withdrawals increases, promoting long-term holding.Books on the psychology of money provide detailed analysis of the irrational decision patterns caused by mental accounting.
Practical Techniques to Improve Financial Decision-Making
It is impossible to completely eliminate psychological biases about money, but techniques exist to mitigate their effects. First, set a 72-hour cooling-off period before major financial decisions (home purchase, large investments, career changes). This avoids impulsive decisions and enables decision-making based on calm analysis. Second, build the habit of recording investment decisions in a journal and reviewing them later. Verbalizing "why I bought that stock" and "what emotions I felt when selling" makes your psychological patterns visible.
Third, utilize systems that eliminate emotional intervention, such as automatic savings plans and automatic rebalancing. The more human judgment is removed, the more stable long-term returns tend to be. Behavioral economics research has also reported that simply reducing the frequency of investment decisions from monthly to annually improves portfolio performance.Books on investing and emotional control are also useful for developing calm judgment skills.
Next Actions to Overcome Money Psychology Biases
Start by recording your investment decisions for one month. Note the timing of trades, your emotions at the time, and the rationale behind each decision in journal format. When you review after one month, you will see patterns of biases you tend to fall into, such as loss aversion and anchoring. Next, check the automatic savings settings on your brokerage account and verify that a system free from emotional influence has been established.
Understanding the relationship between money and emotions is the starting point for rational wealth building. Using a compound interest calculator to estimate the difference between "repeatedly making emotional trades" and "continuing automatic savings for 20 years" lets you appreciate the value of calm investment behavior through concrete numbers.