Imagine you’re in a supplement store shopping for some fish oil or whatever your supplement of choice is. you find the bottle and it’s $25 a bottle. before you buy it someone else in the store taps you on the shoulder and says hey if you walk 20 minutes down the street you can get the same bottle of fish oil for only $5. would you do it ? now imagine you’re in a car dealership buying a $20,000 and before you make that purchase someone taps you on the shoulder and says you can buy the same car if you walk 20 minutes down the street for $19,980. well would you do it?
if you’re like most people you would save the $20 on the bottle of supplements but you wouldn’t save the $20 on the $20,000 economically. both situations are the same you spend 20 minutes to save $20. so if you have different answers for those two questions how do you explain why they differ? the only real explanation is that are human brains have biases toward thinking about numbers and money.
I like to give you a very simple example in which the brain looks at money as in as percentages savings as percentages instead of absolute value. but even more complex examples of behavioral risk biases and how to overcome those problems make you become a better trader or investor and you’ll realize you’ll be able to stop yourself before you make the common mistake that most rookie traders thinking about their trading decisions.