📖Charlie Munger

Loss Aversion

🌿 Intermediate★★★★★

The pain of losing money is felt twice as intensely as the pleasure of gaining the same amount.

💬

Losses hurt about twice as much as gains feel good.

— Munger on Behavioral Finance，2005

🏠 Everyday Analogy

Just as scoring 90 on an exam brings joy, the pain of scoring 70 is twice as intense as the happiness from the 90-point result. For the same 20-point difference, the pain of loss far outweighs the pleasure of gain—this is the asymmetric nature of human psychology.

📖 Core Interpretation

The pain of a loss is felt twice as intensely as the pleasure from an equivalent gain.
💎 Key Insight：Loss aversion drives terrible investment behavior. Investors hold losers too long (to avoid realizing a loss) and sell winners too quickly (to lock in a gain). This asymmetry is hardwired into human psychology. Munger overcomes it by focusing on expected value rather than emotional reactions. A rational investor treats gains and losses symmetrically.

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❓ Why It Matters

Loss aversion leads to excessive conservatism, reluctance to cut losses, and rejection of reasonable risks.

🎯 How to Practice

Evaluate decisions based on expected value rather than emotion, and accept that short-term volatility is the price paid for long-term returns.

🎙️ Master's Voice

I think track records are very important.
Munger weighs opinions by track record. Past performance predicts future reliability better than credentials or confidence.

⚔️ Practical Guide

✅ Decision Checklist

  • What is this person's track record?
  • Am I evaluating by results or words?
  • Do I weight opinions by credibility?

📋 Action Steps

  1. Check track records before trusting advice
  2. Weight opinions by past accuracy
  3. Build your own track record

🚨 Warning Signs

  • Trusting credentials over results
  • No verification of claims
  • Ignoring poor track records

⚠️ Common Pitfalls

✕Moderate loss aversion is beneficial.
✕Completely ignoring losses leads to recklessness.

📚 Case Studies

1
Dot-Com Bubble Caution (1999)
Munger avoided overvalued tech IPOs despite fear of missing out, preferring businesses he understood with durable moats and sensible prices.
✨ Outcome：Lost short-term gains as tech soared, but avoided massive losses when the bubble burst in 2000–2002.
2
Berkshire’s Crisis-Era Discipline (2008)
During the financial crisis, plunging stock prices triggered widespread panic. Munger and Buffett resisted selling quality holdings at depressed prices, focusing on intrinsic value.
✨ Outcome：Avoided crystallizing heavy losses and later benefited as markets and core holdings recovered strongly.

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