There is a motto among investors that shareholders “vote with their feet.” Remember when we buy stock, we own a piece of a company. That means we can vote on things like electing a board of directors.
Most of today’s investors don’t care about voting on corporate stuff. We just want to buy a stock and sell it for a higher price later. We couldn’t care less about the board of directors. When we tire of owning a company’s stock, we sell it, so we vote with our feet.
I think this election showed us a pure example of this phenomenon. In economics, we learn by looking back and analyzing why an event happens. When you buy or refuse to buy a certain product or brand, economists want to know why you made your decision.
Why did the American people elect Donald Trump as our president?
I have two words for you: Loss aversion. A simple Google search defines loss aversion as a “cognitive bias that describes the tendency to perceive losses as more significant than gains of the
same magnitude.” In other words, people are more sensitive to the possibility of losing something than winning the same amount.
It’s a term used mostly in the financial realm, but I think this occurs everywhere in life. Make an A on a test, you’ll focus more on the question you missed than the many more you got right. Our favorite team becomes a bunch of bums after a loss even though they ended the year in first place.
From that perspective, let’s look at the last three elections.
Briefly, I think 2016 was the year of trying something new. Across the pond, the citizens of the United Kingdom voted to leave the European Union, which became known as BREXIT.
When I saw that news, I remember telling my dad that Donald Trump would be our next president. It was too bad I didn’t put money on it! I just had an overwhelming feeling that the people around the world wanted to try something different.
I think Hillary Clinton lost because she represented the old system. Her campaign screwed up because they focused on Trump’s inexperience, but that was exactly what the people wanted: Something new. That race was over before it started.
The 2020 election was in the middle of COVID, and loss aversion was on voters’ minds.
Unfortunately, when things go wrong, we need someone to blame. Our team loses, we blame the coach. A business loses money, we fire the CEO. When a pandemic shuts down the world and a million people die, we fire our leaders.
For the first time in our lives, Americans were told how to live, and it pissed us off. Plus, many of us lost our jobs and basic supplies were not readily available. Who knew toilet paper was such a luxury?
While parts of Trump’s first presidency may have been good, voters focused on the negatives caused by COVID. The change experiment was over, and we elected one of the most experienced politicians in history. Seriously, Joe Biden has been in politics longer than I’ve been alive. Like him or not, that’s something!
After the attack on Pearl Harbor, Japanese Admiral Yamamoto said, “I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve.” I think COVID woke the giant as well. Not militarily, of course, but in the drive of the American citizen.
Yes, there were struggles before COVID and we still face challenges, but if we’re honest, Americans have a great life overall. Perhaps we became a little complacent and COVID reminded us of how easily the lifestyle we enjoy could be taken away.
Loss aversion followed us in the 2024 election as well.
Any political expert would say the candidates are focused on winning over a small portion of voters. For example, 45% would vote one way and 45% the other, so 10% of voters would decide the election.
I think loss aversion skewed those “given” numbers more toward Donald Trump. It wasn’t that the people necessarily liked Trump, but they were unhappy with their living situation. Furthermore, there was a large number of people who believed the 2020 election was rigged.
Again, loss aversion means we focus on the bad, so you had two angry groups of voters participating in the 2024 election. One group has been waiting for four years to get their revenge from the 2020 election. Joe Biden could have been a perfect president, and he still would not have been able to win over this group.
The other group was voting with their feet. These people were angry about inflation and the life struggles we have experienced after COVID. Although the economic data was positive, showing decreasing rates of inflation, loss aversion prevented us from seeing the improvements.
We remembered the pain we felt in our wallets. Adam Smith was right. When it came down to it, human beings did what they believe is best for them individually. As with 2016, this election was over before it started.
Is it possible to overcome loss aversion as an investor?
In Miracle, Herb Brooks addresses the US Olympic Hockey Team about playing against the Russians. Instead of sitting back and defending the far better team, Brooks wanted to attack them. I think his exact words were, “You take their game and you shove it down their throats because you can!”
I think Brooks understood loss aversion. Nobody expected Team USA to win that game. It had to be in the players’ heads as well. Brooks knew that he had to make the team believe in themselves before they stepped on the ice.
Think about this in our own lives. How often are we defeated before we start? It’s hard to admit, but self-reflection is important if we are trying to build a better life.
Having a plan and a vision of where you want to be is the way to overcome loss aversion. You will lose money in investing. Remembering the big picture of your future goals allows you to look past these small speed bumps along your journey.
Whenever I lose in an investment, I remind myself that I probably would have wasted that money anyway. For example, I have Nintendo Switch games that are still in the wrapper. And I’m probably getting another one for Christmas!
Surely, we all have similar stories. I’m sure I have others, but the video game was funny to me. We don’t dwell on these purchases and even learn from them. We can do the same with our
investments!
When we lose, more often than not, we have an opportunity to learn. I’m sure we have all heard a coach say that, but the message works off the field as well. We should never be afraid to fail; we should be afraid to try.
Look at your financial situation. If you want to be in the same place 15 years from now, then don’t change a thing. If you want the chance to reach your goals, then you’re going to have to take some risks.
Risk aversion is healthy and we can build your investment portfolio around that. However, loss aversion can derail your dreams. It may have cost Kamala Harris her chance at the presidency. Don’t let it stop you from pursuing your goals. Email me!
