Below is an image of medal winners from 2 separate events.
Can you look at the faces of the winners, and find out who is the silver medal winner?
Yup, you guessed it right. The one who appears least happy is the silver winner.
Simple logic suggests that the happiness should in be order of the medal won
Gold winner >> Silver winner >> Bronze winner.
But in real life many times we find the happiness usually in this order
Gold winner >> Bronze winner >> Silver winner
Why does this happen?
In simple words, our mind tends to evaluate any outcome from the point of what could have been, and not what it is?
We get anchored to the best possible outcome. Then even if we have a good outcome, we feel dissatisfied.
The silver medal winner had a shot at gold, and he/she lost this fight.
The bronze winner was the best of the rest, and was almost about to not win anything.
This behavior impacts many other areas – investing in particular.
If you buy a stock at 100, and it goes to 500, then comes down to 300, you will be unhappy. You have still made 3x your investment, but what is in your mind is it could have been 5x.
This is known as counterfactual thinking, and can trigger responses the next time we face such a situation. The next time if I hold a stock that doubles, my urge to sell is higher, since I saw the previous one fall from 5x to 3x.
Whether in investing, or in entrepreneurship, it is important to account for some of these behavioral biases instead of assuming that we are all rational beings.
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Till next week. Keep learning.