The terms ‘profits’ and ‘losses’ are common parts of the business vernacular. However, many people don’t fully understand their role in a market economy. This has become even more pronounced after the recent financial crisis. To date, the government has attempted to perpetuate a system of profits without losses. The problem with trying to build a market economy without both profits and losses is that it will inevitably lead to one of two extremely undesirable results.
Everybody hates to lose. One of the trends that many people experience in the world of investing is a noted tendency to become ‘gun shy’ when they experience volatility in their investments. The reason for this is because our psychological makeup is much more afraid to lose than joyful over gains. This leads many people to either become irrationally risk-averse or to take risks that they are not aware of in a desire to achieve safety. The problem this creates is that fear of loss can make people blind to the opportunity for gain.