Are you Ioss averse? Watch out!

[Larry Turowski]

I bought a house that had hidden, but major termite damage.  I got it at a great price.  And I should have turned right around and sold it at a fire-sale price, accepting my loss up front.  Instead, I held onto it for a couple of months while my crew was busy with another rehab.  The eventual rehab went way over budget and took a lot longer than I planned.  I lost money on the deal--more than I'm sure I would have lost if I had just sold it immediately.

You see, I was loss averse.

As investors, we have a good deal of risk inversion.  We want to buy right so we know we are going to make money.  You make your money when you buy, as they all say.  We are minimizing, but not eliminating risk.

The problem is, on those occasions when things go wrong, we tend to be even more loss averse than we are risk averse.  This makes us take on higher risk.

When the tenant doesn't pay, we hate the idea of losing rent so we let them stay and hope they pay as promised.

When the cheap contractor doesn't finish the job or doesn't do it right, we hate to lose what we've already invested in the project and hate having to pay even more to do it right.

When I knew the house would be a loser, I doubled down like a gambler when I should have walked.

Don't let loss aversion make you risk tolerant!  Evict the tenant.  Fire the contractor.  Sell that money loser.  And get back to being risk averse.

Here is a good read: http://www.theemotionalinvestor.org/wp-content/uploads/2012/05/Risk-vs-Loss-Aversion.pdf