We’ve all heard it before: “trust your gut.” And while our instincts can serve as powerful guides in many situations, when it comes to financial decisions, the waters get murkier. Why? Human nature often makes us risk averse, meaning we tend to prioritize avoiding losses over achieving equivalent gains.
A classic study by Tversky and Kahneman in 1991 found that people feel the pain of losing $100 more intensely than the pleasure of gaining the same amount.
This phenomenon, known as “loss aversion,” highlights that our natural inclinations may not always align with optimal financial choices.
Let’s say, for example, you might feel nervous about making a particular financial investment, not because of its viability, but perhaps due to a past unrelated financial mistake. In this case, past emotions are clouding current judgement.
While intuition and emotions play a vital role in our decision-making, in personal finance, data often speaks louder than the gut.
So, the next time you’re about to make a financial move, take a moment. Reflect. And remember that while our gut can guide us, a well-informed mind can lead us to better outcomes.