The Break-Even Effect
Avoid risk-seeking behavior after a loss
The Break-Even Effect is a phenomenon where investors tend to seek riskier investments after experiencing a loss, in an attempt to break even. This can lead to further losses and undermine the investor's long-term strategy.
- Avoid risk-seeking behavior after a loss
- Be aware of the Break-Even Effect and its potential impact on investment decisions
- Take a disciplined approach to investing and avoid making impulsive decisions
- Recognize the Break-Even EffectBe aware of the tendency to seek riskier investments after experiencing a lossPro tipTake a step back and assess the investment decision objectivelyWarningBe careful not to fall into the trap of risk-seeking behavior
- Take a disciplined approachTake a disciplined approach to investing and avoid making impulsive decisionsPro tipUse a well-thought-out investment strategy and stick to itWarningBe careful not to deviate from the investment strategy
- Avoid risk-seeking behaviorAvoid seeking riskier investments after experiencing a lossPro tipFocus on making informed investment decisions based on thorough research and analysisWarningBe careful not to fall into the trap of risk-seeking behavior
An investor bought shares in the Royal Bank of Scotland at £22.29 and sold them at £18.62, realizing a loss of 16%. If the investor had not sold, they would have required a return of 667% to break even, which is highly unlikely.
An investor bought shares in Compass Group at £3.19 and sold them at £3.04, realizing a loss of 5%. The stock went on to return 143% after the sale.
The concept was first identified by researchers Mike Thaler and Eric Johnson, who found that investors tend to seek riskier investments after experiencing a loss.