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Max Bazerman, a lecturer at the International Business Academy, is known today, if not by all, then absolutely surely by many. The scientist, professor of psychology became known in all circles of stock trading due to his famous phenomenon, named after him. The highlight of his discovery is his genius, and, as you know, everything that is genius is simple.
The greatest horror for all businessmen has always been the fear of losing their assets. Sooner or later, any person involved in financial activities is faced with a problem that formed the basis of the Bazerman phenomenon.
Experiments have shown that when faced with the risk of losing money, a person often begins to behave very irrationally. In support of this rule, Professor Bazerman conducts a demonstration experience for first-year students every year.
The experience begins with the fact that the professor invites his students to enrich themselves and acquire $ 20 at a price below par. He proposes to do this through an auction, the initial price of which is a dollar. The only unusual bidding condition is that the student who finished second on the results must give the professor his last bid. The students, spurred on by the feeling of enrichment, quickly start trading, the rate of which quickly reaches the $ 12-14 mark.
After a bet of about $ 16, most of the participants die out and give up the idea of becoming richer. But the excitement and lust for profit drives the remaining students to increase rates. Gradually, with increasing voltage, the rate also increases, which gradually reaches the denomination of the bill.
The roots of this behavior lie in the fear of losing more than gaining. With a price of $ 18, the person in second place realizes that the next bet will win a little more. Realizing this, he also understands that in addition to being left without a win, he will have to part with his 18 dollars. It is this fear of losing their money that makes the second participant make the next bet, in the hope of at least staying in the balance.
This is where the fun begins. The price goes over $ 20 in one hundred percent, and the audience is shaking with laughter from the students. However, nothing ends there, and the rate continues to rise. If earlier the players were driven by excitement, now they are spurred on by the desire to lose as little as possible. And so it goes on until one of the remaining participants surrenders. And note that these are not stupid youths who are easily misled, but smart adults, behind whom, often, work in reputable offices.
As surprising as it may seem, Professor Bazerman managed to sell $ 20 for $ 50, $ 70 and $ 100. The personal record, according to the teacher himself, is exactly 204 (!) Dollars. Of course, during the auction, the people around sit and think how stupid the rivals are, since they have fallen into such, at first glance, an elementary trap. But no one can say with absolute certainty how they themselves would have acted in such a situation. Lest you blame the professor for self-interest, it is worth saying that he sent all the money he won to charity.
What is the moral of the Max Bazerman phenomenon? And the moral here is very simple - a person, getting into a situation that threatens with the loss of money, begins to behave very irrationally and even strange. You can get under the influence of the phenomenon not only at the auction, but also at various stock exchanges, casinos, currency exchange (for example, Forex). People, suffering losses, begin to invest even more and try to recoup, but as a result they lose much more. In order not to fall into such a trap, you should follow the simple rules of the same professor Bazerman.
Actually, there is only one rule, but neglect of it can push you into a pit of uncontrolled losses. The rule is to determine for yourself what the maximum amount you can afford before starting the game (bidding, auction). And if during the auction the rate goes beyond your border, stop the game, even if it seems to you that there are still chances to win back.
For example, you play poker with several thousand in your pocket, but in order not to leave with anything, you decide in advance that you are ready to lose only a couple of hundred, then after you lose two hundred, immediately get up from the table and leave. In the financial environment, such amounts are called Stoploss, while the very fear of losses is called Loss aversion.
Also, do not forget about the stop loss and those who are going to start their business from scratch. Any business, at the beginning of its activity, will not generate income until it reaches the break-even level. Therefore, a novice businessman needs to know the threshold to which he can fall into a minus, and, if the limit is exceeded, it will be necessary to close the business.
Even if it seems to you that you simply did not correctly define your threshold. Most of the cases from practice indicate that if you misdefined your threshold, then most likely it is none of your business, at least for now.
Many psychologists agree on the fear of loss. Scientists associate this with the fact that, during various kinds of games, a person is always driven by excitement - excitement, experience, enthusiasm, passion. By itself, it does not carry anything bad and even serves as an excellent background for achieving the goal.
But when passion develops into the only thing that brings pleasure to a person, then he merges with the personality, and then the loss begins to be associated with the loss of himself. A variety of hobbies can serve as an antidote to this. The more interests a person has that give him pleasure, the less he depends on the fear of loss.
From all of the above, we can conclude that a person who cannot imagine his life without the risk that gives him pleasure can fall into Bazerman's trap. A person for whom passion is simply an additional background, a factor in achieving a goal, will not rush headlong at any opportunity to get an easy benefit.