What has heightened the loss aversion further in the current crisis is the magnitude of losses that investors have suffered, and the duration for which the crisis has gone on.

Today, investors are like deers on a jungle road, frozen into inaction in the beam of a passing vehicle. As Richard Thaler and Cass Sunstein say in their book Nudge, “Loss aversion helps produce inertia, meaning a strong desire to stick with your current holdings.” This explains why the HNIs in the Barclays Wealth survey are unwilling to change their asset allocation in favour of riskier investment products even though they perceive opportunities. This inertia also manifests itself in investors’ reluctance to come to terms with their situation: book losses, or examine their portfolios to see exactly how much money they have lost.

Besides, at a time like this, before a decisive recovery gets underway, economic and financial data tends to send out conflicting signals. This adds to investors’ confusion and their unwillingness to take further risks.

The fallout

The financial losses and pain caused by the crisis have, however, had some positive effects as well, as the Barclays Wealth survey found. Respondents expressed a preference for simple and straightforward asset classes like cash, real estate, government bonds and domestic stocks. This can be explained by the fact that in times of crisis investors tend to find solace in the familiar. Besides, the widespread perception that the current crisis was triggered in the first place by complex financial instruments has added to the yearning for simplicity.

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