Are you guilty of this? I am
According to The Four Pillars of Investing by by William J. Bernstein, myopic loss aversion is defined as “focusing on short term dangers and ignoring the far more serious long term ones.”
Unfortunately, it’s pretty easy to do that. Think about roller coaster ride (with an enormous dip) that has been the stock market in the recent past. It’s really hard to sit and watch your investments drop like a rock.
The tendency is to panic and do whatever you can to avoid the short term danger of potentially losing money, while ignoring the much more certain scenario of inflation eroding the value of your savings over time.
Somehow, inflation (except in the case of hyperinflation) just isn’t as visible. It creeps up on us, and we get used to the gradually increasing prices and the gradually decreasing amount of interest earned on our savings. Because it’s a slow and steady danger, it doesn’t seem as dangerous, even though its effects are much more far-reaching than a short term drop in the value of our investments.
The same thing is true (on an even larger scale) with not investing at all, and with not building up savings. The more immediate need of paying our monthly bills feels more important to focus on, while the idea of retirement or paying for our children’s college is some hazy thing way off in the distance.
Have you had this experience? How do you keep an appropriate balance between short term dangers and long term ones? Me, I try to recognize that even though things like retirement seem far away, they’re really not in the big scheme of things. And so I invest steadily for that future that’ll be here before I know it. But it took a moment of panic to get me to that point.
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