Loss Aversion

Loss aversion is a cognitive bias defined by Wikipedia as the disutility of giving up an object is greater than the utility associated with acquiring it.

Investors will continue to hold a position in losing startups because of hating to lose and clinging hopefully to a potential turnaround.

To overcome loss aversion startup investors should consider these points:

When making an investment consider the funds lost from day one.  Any returns will be a pleasant upside. 

Consider the fundamentals of the business and not just the current status.

Treat the investment as a financial transaction and not a personal win or loss.

Diversify your investments so one loss is relatively small.

Keep in mind the overall position of investments rather than each specific deal.

Develop a plan for each investment including follow on funding, early exit options, and tax write-offs if it all goes to zero. 

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.