Loss Aversion and Analysis Paralysis

By Jimmy Turner, MD
The Physician Philosopher

Have you sold winning investments instead of losers? In an attempt to deny the loss (to yourself)! Are you focusing on an investment that lost money? Ignoring the investments that you still have….Does it take you forever to make a decision? Are you afraid to make the wrong decision? Today’s blog is all about helping you to understand the concept of loss aversion and analysis paralysis. They play a huge role in your finances, and once you understand how these behavioral finance topics influence your decisions – you will have more control over your finances. Our goal is for you to understand how loss aversion and analysis paralysis can change your relationship with money. This blog can be used as an educational tool for general guidance. We want you to overcome all of these self-defeating habits! When I work with my clients I like to know about their career goals and life plans, so the information here is more of a springboard. Today’s blog is here to inspire you to ask yourself questions, look at your habits and beliefs (behavioral finance) and to investigate the topics further. Last week I wrote about framing, this week I’m continuing on that theme by introducing the idea of loss aversion.

Losses & Gains

Are you excited about your losses? There are studies that show that you will hate your losses about twice as much as you enjoy gains. We all hate to lose…that is especially true when it comes to our money. I’ve read studies that said when you gamble, your win needs to be over two times the loss. That is due to the pain threshold. The innate distaste for loss has a profound impact on your financial decisions.

Loss Aversion

Here is a concrete example. I recently sold my beloved Chevy SS and bought a truck. My Chevy SS was awesome. It was a rear-wheel drive, naturally aspirated V-8 with a stick…and hold it…hold itI ordered it from Adelaide, Australia! So this was not an ordinary car. I was attached to his car, which made it hard for me to be objective about it’s worth. Though I used tools to figure out how much the car was worth, I thought it should be worth more than it actually was on the market!

This is called the endowment effect.

The psychology behind the belief is that people hate to lose things, which is another way to explain loss aversion. That’s what I was feeling when I sold my amazing car – and bought a practical truck. Again human psychology has shown that people will risk more, to avoid the pain of loss, than they will in order to make gains. Simply stated:
  • You’ll do something to prevent feeling the pain of loss (denial, avoidance, or behaving like an ostrich)
Instead of:
  • Taking the same amount of risk or effort to feel good
This is loss aversion.  It is the same concept that shows up when we dwell on a mistake for a long time, compared to the briefness that we spend rejoicing when things go right.

Loss Aversion: Example #1

Let’s say there is this event that you’ve been wanting to attend a long time. Finally, it’s all falling into place. You buy the ticket, schedule the time off, and you have a babysitter for the children. Then the weather forecast starts to look concerning, but you still have hope. That is until it’s announced that this will be the worst blizzard to hit the city in decades. There are even warnings to buy supplies early, and that schools may close. However, you bought the ticket, and you don’t want to lose the money. Are you willing to drive on icy streets in blizzard conditions? How important are your safety and welfare? You may still be determined to attend the event. You have “invested” money, and time making arrangements for this special day. Nevermind, that the money’s gone and it’s never coming back. The idea that you have to get your money’s worth is what we call sunk cost fallacy in behavioral economics.

Loss Aversion: Example #2

What if we build a pizza?  In this example, consumers were asked to either build up a pizza, by adding ingredients or scale down a fully loaded pizza, by removing ingredients. True to the idea of loss aversion, the consumers that were asked to remove ingredients ended up with pizzas that had even more toppings than the people who were told to add them! Are you questioning the mathematics in that unexpected outcome? You’re not alone!

Status Quo Bias

Are you resistant to change? You are not alone if you dislike things changing. Most people like the comfort of things being predictable unless they are forced to change because of a good reason to change. That is especially true for people who are regimented in their daily life. In terms of finances, it can be compared to those bills that slowly increase over time. In Ryan’s case, it was the auto insurance that was creeping up. He didn’t just decide okay, they are inching my costs upward, he needed to make those calls and get new quotes. It wasn’t until Ryan moved back to California that he decided to call around. The only reason he took the plunge was that he was already having to make changes for the move. I had a similar experience switching cell phone companies from Verizon to Google Fi. Unfortunately, the network for Google Fi doesn’t work where well in Winston-Salem. I could send and receive texts, but I couldn’t get calls. If someone called me and didn’t leave a voice mail, I would never even know. As a physician who needs his phone to take calls from home or receive an alert that I’m needed at the hospital…that’s bad.  It meant something had to change, and he went back to Verizon!  But only after bucking the status quo.

Switching Gears to Analysis Paralysis

What is analysis paralysis? One thing I’ll tell you upfront is that it’s real, frustrating, and damaging. Imagine yourself taking in a lot of information, exactly like you did in medical school and residency. There are a lot of decisions to make, and the majority of people don’t like a bunch of different options. Why? You have to narrow a broad range of choices down to something singular. It is natural for us to overthink and analyze, which causes many of us to get stuck and spin. You are going around and around with your choices, and flip-flopping with your decisions. That means you aren’t able to move forward, and put a plan of action in place or follow through with anything…even something as simple as a breakfast dish!

Much Ado About Jam

I’m hoping that we don’t overwhelm you with details on the topic of analysis paralysis. I’d like to keep it fairly simple. After all, I am big on teaching people the 20% of personal finance you need to know to get 80% of the results. That’s what we’ll attempt to do with this example about jam (yes, the breakfast jam made out of fruit)! It all began with an experiment in 2000. Psychologists wanted to know if consumers wanted more jam flavor options or less. They went to an upscale market and set up two displays. The first display had six different types of jam. The flavors were the simple and usual ones that we typically grow up with: strawberry, grape, blackberry…. The second display had 24 different types of jam. As you can imagine this was a plethora of flavors. The larger display table attracted 60% of the store’s customers, the table with only six varieties of jam attracted 40% of customers.

Yeah, but which table sold more jam?

The paradox is:
  • From the table with 24 options, only 3% of the stores total customers purchased jam.
  • From the table with six options, 30% of the people bought it.
The take home was that it was easier for the customer to pick one they liked from a limited amount of flavors. The more flavors the more confusing it was to keep their favor preferences straight. So, let’s break this down. With these customers, 50% more people viewed the larger display of jam. However, sales were 10 times higher the smaller display! When people are offered too many choices they freeze. They are consumed by analysis paralysis. Even on something as simple as the flavor of a sandwich. This is one of the reasons that I keep my recommended insurance agent list so short! 

How does Analysis Paralysis Apply to Me?

Imagine the analysis paralysis if it were a larger, and more complicated decision such as investing! Imagine someone new to investing having to choose between the 2,500 types of investment funds. You, like many others, might not know where to start! There are individuals who don’t know where to start, so they’ll contribute money but they don’t pick a fund. What happens in this scenario? The money sits in a money market, but it’s not not doing anything. It’s sitting there…waiting. I get it, it’s hard to narrow down. We all know that physicians are not taught financial literacy while they are in medical school. You leave training with a ton of student loan debt and then the lifestyle creep happens. That is the exact reason for this blog, we want physicians to understand their finances so they can make the best choices for their families and their futures! There are so many different paths you can take to educate yourself on financial subjects. Take it one step, one subject, and one concept at a time! It doesn’t have to be complicated.


Have you heard the acronym KISS?  It’s a reminder that means: Keep it simple stupid. Well, we know that as physicians you are incredibly intelligent. We also know that you are juggling a demanding job, perhaps a side hustle (or three), and a family! Our goal is to help you with analysis paralysis by making it all simple. That brings us to banking structure.

Don’t have more banks than you need!

It doesn’t matter how much money you have, there is no need to have four or five different banks. I’m not talking about a situation where you have your mortgage with one company, and the rest of their products are subpar. In this scenario you’ll want to use them for your mortgage but go to another bank for the products. That’s perfectly understandable. However, you don’t need three online banks. Make sure they have:
  • No fees
  • Good checking
  • High yield savings
Then choose the one that you like the best. Personally, I have to admit that I have banks. The reason why is that I have a:
  • Personal bank
  • Business bank for The Physician Philosopher, LLC
  • And the bank that holds his mortgage only (to get a reduced rate)
I don’t get to choose the bank for my mortgage, and my personal bank doesn’t have a good small business framework. Aside from the mortgage bank, I have two banks. This is understandable because one is for personal use and the other his business. If I had two banks (or more) for his personal use…that would be a different matter! Ryan uses Ally for his personal banking and Chase for his business account.  So, even a financial planner uses two banks given that he has a business on the side.  Since he likes to test things, he’s been checking out SoFi’s investing and their money. He likes how they work!  And I like how they refinance student loans!

How do You Test Bank Accounts?

Ryan will open an account, deposit a check, and try out all the different functions. Nerding out on or “playing” with different banks and their accounts has a bonus side. Ryan learns the infrastructure of the banks and their accounts. When one of his clients has one of the banks or accounts, he can talk to them about it and offer suggestions. This helps his clients deal with the analysis paralysis regarding banking! Here you are…you now painlessly understand how loss aversion and analysis paralysis work. With this knowledge you can work to overcome them and brighten your financial future…or at least make a decision!

Tell us about a time when you suffered from loss aversion or felt the grip of analysis paralysis.  Leave a comment below!





  1. Xrayvsn

    I feel the same thing as that jam experiment when I go to a restaurant that has tons of choices (Cheesecake Factory for example). Presented with so many choices you hesitate to make one for fear of missing out on something else.

    Good points on loss aversion which impacts a lot of people’s decisions

  2. Bill Yount

    Too many choices on a menu leads to starvation or gluttony! Nice post.

  3. Brent Lacey

    I can’t imagine letting go of a sweet ride like an old Chevy SS. Man, that would be tough. Still, the key to becoming successful often depends on what you’re willing to give up. Great analogy on the jam sales experiment. That totally makes sense. How many times have we been in an ice cream shop with 3 dozen flavors and people are just paralyzed making the decision and holding up the line? Like Occam’s Razor postulates: the simplest explanation is usually the correct one. That’s probably why the Three-Fund-Portfolio still has so much popularity behind it. Excellent discussion, as usual!

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