This past Sunday my wife and I were running errands as we normally do. While making the rounds, my wife mentioned that she needed a new water bottle and suggested we stop by Academy, a local sporting goods store. She didn’t have to twist my arm as I, like many men, consider Academy a personal sanctuary. As I was roaming around the store I came across a nylon fishing shirt on sale for about $25. I’m a frugal person by nature and am very good at talking myself out of making purchases, but this day was different. I love getting a good deal, so I bought it and didn’t think twice.
Later that evening we were folding a load of laundry (you’re getting a window into the exciting life I lead). As we were folding the clothes I noticed small black smudges on a few shirts. At first I thought our 8-month old puppy, Arlo, had tracked in dirt from outside. Arlo has a keen ability to disrupt many household chores and loves laying on top of fresh, hot clothes from the dryer. We quickly realized that it was not dirt. I had accidentally washed the clothes with a pen in one of my pockets. Worse yet, my brand new shirt was covered in black ink.
You can imagine my frustration: I hadn’t had the chance to wear the shirt yet and it was ruined. The satisfaction of getting a good deal was literally washed away – the SAME DAY I bought it. By some small miracle, none of the other clothes were greatly harmed. I tried washing it again but no such luck…it was a goner. My sweet wife tried to cheer me up but the disappointment lingered.
Fast forward to last night. I’m in bed reading a finance-related book (I really need to get out more). I came across a section that referenced a study done by psychologists Daniel Kahneman and Amos Tversky on loss aversion. They ran a series of trials with various people to gauge their willingness for taking risks. Their findings showed we humans tend to avoid losses over the opportunity for gains because the losses take a much greater emotional toll.
I’ve read about this loss aversion study before and recognized its validity. But last night it hit me like a ton of bricks. I immediately thought about my new shirt. While I was very pleased to buy it at a discount, that satisfaction was completely wiped away after it was ruined. The monetary loss was not significant. Much of my frustration was because I felt like I could have controlled the outcome. I could have checked my pockets before washing those clothes. But, I didn’t think to do so at the time and my shirt was ruined as a result.
This experience reminded me how significant the emotional responses can be from the decisions we make on a daily basis. As investors, we recognize that in order for our portfolios to grow over time, we are going to experience volatility. We say we’re fine with the ups and downs but it still frustrates us when we see our accounts at a temporary loss. It’s important that we acknowledge those feelings and come to terms with them. At Financial Synergies, we talk with clients all the time about focusing on the things we can control. That’s why we feel so strongly about financial planning. We also realize that things can go awry even with the best laid plans – and that’s OK.
I may go buy another shirt and it may still sting a little bit. Big picture – it’s not about the shirt. It’s understanding that things may not always work out the way we plan, and the importance of being prepared to handle the outcomes, whatever they may be. At the end of the day, it’s all we can really do. That, and check your pockets the next time you do the laundry.