TALKING FINANCE with Justin Baiocchi of Baiocchi Griffin Private Wealth Don't do the death drop Many years ago, there used to be a tourist attraction near Victoria Falls involving a deep gorge over the Zambezi River (I think the OH&S people eventually must have got wind of it and promptly ended the fun). For a fee, thrill-seekers could attempt something called the "death drop". This involved being lowered backwards off a cliff, only to plummet head-first at incredible speed until a climbing rope snags and swings you across the gorge. Being young and foolish back then, I thought it would be a fun thing to do, although all I can remember of it now (if one can call it that) is blacking out as I fell head-first down the gorge. I was recently reminded of this high-octane lunacy when discussing risky investors. These investors aren't content with the gentle, reliable 'swing' of diversified assets; they are always chasing the highest returns, regardless of the associated risks. This fixation on maximum return often links back to a classic financial trap: the house-money effect. Psychologists found that when people get a windfall (a profitable investment or a winning scratchie, for example) they tend to gamble that money far more recklessly than their original capital. Casinos love this, which is why they hand out free chips. The money feels "free," so the risk feels minimal, leading the investor to chase investments that promise to double the windfall in a flash. But as the over-enthusiastic Parisians in the 18th century learned from John Law's Mississippi Company fiasco (the olden days equivalent of Bitcoin, one might argue), if an income return of 120% is promised, that opportunity is usually too good to be true, and the result is most likely a collapse into worthless pieces of paper. Our investing behaviour is deeply wired by our cognitive and emotional states. One of the most common and irrational findings is that most people feel a loss twice as keenly as they appreciate an equivalent gain. So, if an investor takes a huge risk to turn $10 into $20, they get a measure of happiness. But when the inevitable plunge comes, and that $20 falls back to $10, the pain felt isn't just the loss of the $10 gain; it's twice as bad. This double dose of misery can then trigger further irrational behaviour, often leading to either panic selling (herding) or, worse, the disposition effect-holding onto a dud investment for far too long, hoping it will somehow swing back up. My advice is simple: Don't chase the death drop. Focus on building wealth through reliable assets, because the true return comes from consistent gains, not the fleeting, heart-stopping joy of a high-speed plunge. BAIOCCHI GRIFFIN PRIVATE WEALTH Level 1, 462-464 Peel St, Tamworth NSW 2340 6766 9000 AFSL No 424658 This article is general in nature and does not take your individual situation into account. You are advised not to act on anything contained herein, or discussed as a consequence of the contents of this document, without receiving financial advice from a suitably qualified person such as a financial planner, lawyer or accountant. Follow us on Twitter @BaiocchiGriffin Find us on Facebook facebook.com/BaiocchiGriffin Private Wealth www.bgprivatewealth.com.au 3028 TALKING FINANCE with Justin Baiocchi of Baiocchi Griffin Private Wealth Don't do the death drop Many years ago , there used to be a tourist attraction near Victoria Falls involving a deep gorge over the Zambezi River ( I think the OH & S people eventually must have got wind of it and promptly ended the fun ) . For a fee , thrill - seekers could attempt something called the " death drop " . This involved being lowered backwards off a cliff , only to plummet head - first at incredible speed until a climbing rope snags and swings you across the gorge . Being young and foolish back then , I thought it would be a fun thing to do , although all I can remember of it now ( if one can call it that ) is blacking out as I fell head - first down the gorge . I was recently reminded of this high - octane lunacy when discussing risky investors . These investors aren't content with the gentle , reliable ' swing ' of diversified assets ; they are always chasing the highest returns , regardless of the associated risks . This fixation on maximum return often links back to a classic financial trap : the house - money effect . Psychologists found that when people get a windfall ( a profitable investment or a winning scratchie , for example ) they tend to gamble that money far more recklessly than their original capital . Casinos love this , which is why they hand out free chips . The money feels " free , " so the risk feels minimal , leading the investor to chase investments that promise to double the windfall in a flash . But as the over - enthusiastic Parisians in the 18th century learned from John Law's Mississippi Company fiasco ( the olden days equivalent of Bitcoin , one might argue ) , if an income return of 120 % is promised , that opportunity is usually too good to be true , and the result is most likely a collapse into worthless pieces of paper . Our investing behaviour is deeply wired by our cognitive and emotional states . One of the most common and irrational findings is that most people feel a loss twice as keenly as they appreciate an equivalent gain . So , if an investor takes a huge risk to turn $ 10 into $ 20 , they get a measure of happiness . But when the inevitable plunge comes , and that $ 20 falls back to $ 10 , the pain felt isn't just the loss of the $ 10 gain ; it's twice as bad . This double dose of misery can then trigger further irrational behaviour , often leading to either panic selling ( herding ) or , worse , the disposition effect - holding onto a dud investment for far too long , hoping it will somehow swing back up . My advice is simple : Don't chase the death drop . Focus on building wealth through reliable assets , because the true return comes from consistent gains , not the fleeting , heart - stopping joy of a high - speed plunge . BAIOCCHI GRIFFIN PRIVATE WEALTH Level 1 , 462-464 Peel St , Tamworth NSW 2340 6766 9000 AFSL No 424658 This article is general in nature and does not take your individual situation into account . You are advised not to act on anything contained herein , or discussed as a consequence of the contents of this document , without receiving financial advice from a suitably qualified person such as a financial planner , lawyer or accountant . Follow us on Twitter @BaiocchiGriffin Find us on Facebook facebook.com/BaiocchiGriffin Private Wealth www.bgprivatewealth.com.au 3028