People rate probability chances as more significant at the extremes. In particular, an increase from 0% to 5%, and an increase from 95% to 100% each have more impact on people than a change

from 30% to 35%. This is why people have a tendency to “go for the big one” even though the odds are extremely small.

Suppose you have a R4,500 loss on a stock you bought for R5,000. Let’s further suppose that you are given two choices about the future. You are told that you have a 95% chance of losing your entire R5,000 and a 5% chance of getting all your money back if you hang onto the stock. Which would you do?

Most people would hang on, hoping to get all of their money back. The increased value associated with moving from sure loss (a zero chance of winning) to the improbable (a 5% chance of getting your R5,000 back) increases the attractiveness of taking a chance.

But, mathematically, your chances are not good. If you made this decision 100 times, you would lose R5,000 on average 95 times for a total loss of R475,000. In contrast, if you took the sure loss of R4,500 each of the 100 times, then you would lose a total of R450,000. Thus, you would save R25,000 or an average of R250 each time you took the sure loss.

Taking the sure loss frees an investor from the Loss Trap, but the sure loss always seems less attractive than the hope that one’s fortune might turn around by holding onto a position.

From The Loss Trap by Dr. Van K. Tharp