Sunday, February 27, 2011

Happiness in negotiations

One of the courses I am looking forward to next quarter is Negotiations. Although I have to say, it does suck to negotiate - why? No matter how good an outcome you get, it is likely that you will not be happy. There is an inherent tendency to focus on what you left on the table, rather than what you did get. And since typically there is no way to determine exactly what you left on the table, you will always be unhappy.

A book that I am reading now (How we decide) sheds light on this phenomena in investing. Let's say you invest in a stock and it goes up. You sell. Then the stock goes up even further. What happens? You are upset that you lost that money. This disappointment is even stronger when losing money. Let's say you invest in a stick. It goes down, and you figure that you should sell, but you don't - because of a related phenomena called loss aversion; which is that when it comes to losses, we prefer uncertainty, but when it comes to gains, we prefer uncertainty. What happens because of this? You end up selling all stocks that went up, and end up holding that goes down - in short, you are left with a sucky portfolio.

So what's the solution? If you find one, please do let me know - when I do pay off these MBA loans and have some money, I will invest in your solution.

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