Investors Are Loss Averse
So We Need to Actively Manage Risk
Quite often, investors experience the pain of loss twice as much as the joy of gains. In fact, the only certainty in decision making is uncertainty - for every potential for gain, there is a risk of loss. Nobel Prize-winning behavioral research finds that losses loom larger than gains and that people are loss averse. As such, the asymmetry between positive and negative experiences has an evolutionary history.
Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce. The featured graph shows the asymmetric psychological value of gains and losses. A prominent feature is it is S-shaped, and the two curves are asymmetrical. The slope of the function changes abruptly at the reference point: the response to losses is stronger than the response to gains.
Since investors are loss averse, we believe active risk management to control losses within their risk tolerance is an essential requirement of investment management.
ASYMMETRY® Is Our Objective
Our investment objective is positive ASYMMETRY® and we illustrate it with bar charts showing an asymmetric risk/return profile. The black bar is total return and the red bar is the worst decline from the prior peak (called drawdown).
At the individual trade level, our objective is an asymmetric risk/reward, which is higher average profits than losses. When we achieve this as a result of our risk management and focus on the payoffs, the result of our ASYMMETRY® Investment Program is an asymmetric risk/return profile of less downside and potentially more upside.
Defining a Successful Investment Experience
When you work with us, you can expect a straightforward perspective on how your investment decisions impact your lifestyle and goals. Simply put, investing is about realizing your objectives and approaching them without noise and distractions. By associating efficient investing with your greatest personal aspirations, we’ll help you make relevant financial decisions that work in your best interest.