# 50. Self-delusion - the manipulation of self ## 50.5. Methodology/Refinements/Sub-species ### 50.5.11. Loss aversion and the sunken cost effect Despite the fact that we are all pretty much convinced that we make rational decisions about future value, risk of loss and investment, the reality is that most people are highly emotional in their investment decisions. Phrases like "can't lose", "guaranteed returns", "cast-iron investment", etc. are commonplace in conversations amongst laymen about money and “where to put it”. What's more, existing investments very often become emotional attachments, which make them harder to sell or abandon, even when, rationally speaking, the facts dictate that the investment should be sold or abandoned. The classic case of this phenomenon is when someone buys a ticket for a concert or movie in advance. Prior to the performance they learn that it is a disappointing event and has received very bad reviews….: "a waste of time". However, even ticket holders who are totally convinced of the worthlessness of the event will attend the event anyway, because they have already paid for the ticket. Logic would demand that the ticket be thrown away because of the huge weight of negative criticism, but the emotional fear of loss obliges the victims to attend the event anyway. They do this because they are "loss averse", and despite the fact that they are effectively "throwing good money after bad" by wasting time and money in attending something that everyone else thinks is rubbish. This irrational attachment to the original investment (i.e. the ticket) clouds their judgement, and they are unable to rationalise the idea of discarding the ticket and saving their time by not going to the event. This is delusional behaviour; it is widespread, and it was most spectacularly seen in the collapses of property or investment bubbles such as the famous internet bubble of the 1990s and the property market collapses of the 1980s and 2007. In these and many similar financial and economic collapses, ordinary investors, including corporate investors, tended to hang on to their investments, even after there was ample evidence that their investments were unlikely to gain value and were already seriously overvalued. The late 1990s produced some spectacular corporate failures in the internet sector. Many internet companies build on poor business models experienced huge gains and cataclysmic losses in share value. And yet many investors stayed in the market until their investments became literally valueless. Such was their "emotional" attachment to their "pet" investments. Around 2007-2008, the housing markets of many parts of Western Europe suffered a similar fate, triggered off by the panic over US "sub-prime" mortgages, where huge amounts of credit had been extended to borrowers of poor credit-worthiness. Ordinary investors had been previously encouraged to borrow money to "invest" in domestic property because of the street myth that "property always gains and can never lose value". The important caveat missing was "if it is bought at a price close to its fundamental value". Huge speculative prices were indeed paid for relatively modest properties, as investors fought to get a share of "the action" and get onto the "property ladder". Very soon property prices were absurdly inflated against their fundamental value as "just a place to live". When the bubble did start to deflate, it was clear enough to any rational investor that it was time to leave the field. However, again, the loss aversion delusion kicked in and many ordinary people couldn't bring themselves to accept a break-even price or even a small loss. Many small investors decided to wait - until they had a really big and completely unmanageable loss on their hands. Many investors simply couldn't contemplate the idea that their beloved investment was failing. This emotional attachment to an investment has cost many ordinary people their life savings, and brought untold misery to millions of ordinary, naïve people and their families. The phenomenon is clearly a form of self-delusion but it also provides fertile ground for external manipulators who know that ordinary "punters" will always tend to buy at the top of market and sell at the bottom. The financial manipulators of the capitalist world understand this delusional behaviour very well, and take advantage of it to time their departure from and entry into a market; the rule of the professional investor being to sell at the point of maximum public optimism and buy at the point of maximum public pessimism. In the case of the so-called "Euro crisis", the point of maximum pessimism was probably around February 2009, the point at which European stock markets started drifting upwards again after 2 years of severe falls. The opposite of loss aversion is "efficient investment". A central principle of efficient investment was put very succinctly by one of the old Rothschild dynasty who, when asked about when to sell, said "Don't be too greedy, sell when you have a profit, and leave the last 10% (before the peak of a market) for the people… ". Even in those days, the delusion of loss aversion amongst ordinary punters was well understood and manipulated by various capitalists to generate and protect profit.