Something to lose

Loss aversion and how to insure against loss.

written by oz chen

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When you get what you want, you’re faced with the possibility of losing it.

Sometimes, before I drift off to sleep, thoughts of dying would violate my mind. The existential fear would return for its nightly residency: What if it was all over? Just ended like that?

I’m embarrassed to say this still happens despite confronting my fear of death in a medicine ceremony.

The one reliable thing that calms me down is to recognize that I fear death in part because I value my life.
And so I’d focus on that.
I have a good life. I’ve made incredible memories. I love people.

You’re winning in life if you have something to lose.

Losing money means you have money to lose. Losing a loved one means you have love.

There was a moment in Taiwan when my brother in law took forever to adjust child seats in our rental car.
He felt sheepish for taking so long, and felt compelled to explain to me:
“In case there’s an accident, there’s less of a chance that my sons fly through the windows.”

I’m sure every parent experiences the fear of their kids getting hurt or dying.
That’s deeply, deeply primal.
We’re programmed to avoid loss, hurt and pain.

Loss aversion and protecting against the downside

Behavioral psychologists have this term: loss aversion.

They’ve conducted experiments showing that people are willing to take on risk to avoid a loss, even when they’re not willing to do the same for gain.

Meaning we’re more willing to go out of our way to NOT lose a dollar, than we are to gain one.
Maybe it’s something to do with our evolution; we are conditioned to conserve and avoid risk.

Insuring against risky is so inherent in human nature, it’s often mandated. States like California penalize you if you don’t carry health insurance. This makes sense—health is one of the most expensive things to lose.

But what about less obvious things to insure against?

Counterintuitive examples of protecting against the downside:

  • My female friends froze their eggs to protect against the loss of fertility
  • Prenups protect against financial losses from divorce.
  • Renter’s insurance can provide surprising protection, including items outside of the home.

Question for you: What are some unique ways you’ve seen to insure against the downside?

Sure, many types of insurances are the domain of the rich. Some celebrities have unusual insurance policies on their legs (Rihanna), voice (Mariah Carey) or taste buds (Gordon Ramsey).

But protecting against the downside is a relevant concept for anyone building wealth.

The question isn’t just “Should I get X type of insurance?” It’s “What are the things in my life that I’ve worked hard for, that would be painful to lose? How do I insure against those potential losses?”

To help you decide how much to insure, try to size the problem.

  • If your tax bill is more than $10,000, it might be worth spending 10% of that on a CPA.
  • If your assets have surpassed 6 figures, it might be worth investing one time on a financial plan from a CFP.
  • If lack of financial literacy is costing you, invest in a money coach to set up a personal finance system.

Here’s how I convinced my client to hire a tax professional:
You have a lot of wealth to protect, spending $1000 – a forgettable amount of money for you – can increase your knowledge and confidence in your taxes going forward. Even if you don’t use a CPA again, the process of working with one will highlight blind spots and help you catch important things going forward. Think of it as paying for a bit of insurance for your financial life.

One of the most counterintuitive types of insurance is gaining knowledge. This can be DIY, or hired help can expedite your progress.

Invest a forgettable amount of money to learn an unforgettable skill.

But don’t do it to paranoia. Just size relevant risks, decide on an action, and be done with it.

Something to lose; something to live for

I met my love a day after I turned 35.

Inevitably, loss aversion rears its annoying face.
What if it doesn’t work out? Did she make it home safe? Will we stay in love?
My protective side gets activated.

Whenever I have intrusive thoughts, I try to use the opposing force of gratitude.

Appreciate what I have now. Enjoy my loved ones. Spend less time ruminating on inconsequential things.

Because if you feel like you’re losing something, then you value it.

And that’s a beautiful thing to celebrate.

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