Talking to a client about choosing between selling two properties recently made me realise the predicament such decisions bring. Two properties, one to be sold at a loss, the other at a gain. It doesn’t seem complicated but add our emotional response to it and it becomes so.
Selling the one property at a loss irks him. And he’s not alone. We know from behavioural research that most people do not like to lose anything, let alone money. I believe that so much of the reluctance to realise losses has to do with shame and regret. In this instance, shame for having made a foolish decision in the first place. Or regret for not having sold earlier or even having bought it in the first place.
And on the other property, the handsome gain he will realise should feel like success. But it comes with a sting, as he will be liable for a whopping capital gains tax bill. We don’t like paying tax when it’s not spent wisely. There’s no deep behavioural finance explanation. It simply feels like a waste of money.
He may, therefore, be stuck. The consequence of realising a gain is paying tax. The consequence of realising a loss is pain.
In finding a way out, our minds may crunch the numbers over and over while we weigh up which discomfort is most palatable.
This is often where we can help. Separating the pain from the process. In this example, there was a rational decision to be found for our client’s problem. When we did the calculations, there was one clear cut answer for his specific problem. Sell the loss-making property, no matter how painful it might be. Look to the numbers. Make peace with the shame or regret.
Avoiding pain is human. Losing money to avoid that pain, is unnecessary.
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