Tips To Make Better Decisions In A Down Market

September 22, 2017 05:28 AM
 
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When the stakes are higher, should you make cautious business decisions or riskier ones? The answer might surprise you.

“Five years ago, most farmers were making money, but now they are losing money,” says Ray Massey, professor and ag economist, University of Missouri Extension. “You’d think people would be more conservative. But farmers may think they need to go all out and take the risk because they are losing money.”

Loss aversion, a behavioral economics concept, explains the pain of losing is psychologically twice as powerful as the pleasure of gaining.

“You like winning and dislike losing,” Massey says. “But you dislike losing more than you like winning.” This concept can make agreements difficult to reach. “Negotiations over a shrinking pie are difficult because they require an allocation of losses, whereas an expanding pie is an allocation of gains,” Massey says. “If you conceded $25 an acre in cash rent as a landowner, you encounter a loss, and your tenant just made $25.”

Another powerful and related emotion is the endowment effect, which says people will tend to pay more to retain something they own than to obtain something new.

“Once you get something, you want to keep it,” Massey says. “Farmers retain assets, especially land, longer than they should from a purely business perspective.”

Understanding these emotions
can be advantageous for farmers as they work through lease negotiations, marketing plans and growth opportunities.

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