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By Taylor Tepper
February 5, 2016

Sometimes the best way to grasp a complex concept is with a simple picture. The videos in “Big Ideas in Simple Sketches” offer illustrated insights from some of the best minds in money. The drawings may look pretty basic, but the thinking behind them will ultimately make you a better investor.

In a 1979 paper, psychologists Daniel Kahneman and Amos Tversky first drew this simple line to illustrate a phenomenon, confirmed by clever experiments, called loss aversion. (Kahneman would later win the Nobel Prize in economics, in part for this insight.) The line’s relatively sharp drop toward despair on the losing side shows that pain sets in quickly when we lose. Faster, in fact, than pleasure rises when we win.

Watch next: How Investors Can Conquer Their Fears When the Market Gets Rocky

Behavioral economists say loss aversion helps account for why you may be reluctant to sell and admit to a loss on a poor investment, but eager to take money off the table if you have a winner. It might also be a reason that saving is hard: The pain of “losing” the dollars you put into a 401(k) instead of getting to spend them may outweigh the happiness you expect to feel as the money grows over time.

Advertiser Disclosure

The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

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