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Are We Living in a Loss-Averse World?

(Photo: Blatant World)

Three years ago today, the S&P 500 closed at 676.53.

Today, it opened at 1366.50.

As Businessweek asks: where’s the party for this bull market?

The article, by Whitney Kisling, is interesting throughout, exposing the massive pessimism still attached to the markets despite this steep recovery. It is well worth a read for anyone who believes (or wants to believe) that behavioral economics has a lot to teach us about real-world investing behavior. The money quote:

“What you’re seeing is a gigantic exercise in behavioral finance,” says Brian Barish, president of Cambiar Investors, referring to studies that show investors feel the pain of losses more intensely than the pleasure of gains. “The ability to scare the hell out of people is much greater than the ability to attract them to equities.”

He is talking about what’s known as loss aversion. Believe it.