Downside financial risk is misunderstood

The mathematics of downside financial risk can be difficult to understand: for example a 50% loss requires a subsequent 100% gain to break-even. a given percentage loss always requires a greater percentage gain to break-even. instead,many non-expert investors may assume for example that a 50% gain is sufficient to offset a 50% loss. over 3,498 participants and five experiments,the widespread illusion that a sequence of equal percentage gains and losses produces a zero overall return was demonstrated. participants continued to err frequently,even with percentage returns of +/-100%,or when financially incentivized. financial literacy,numeracy,and deliberation were all shown to independently contribute to accurate performance. these results have implications for promoting the understanding of downside financial risk. © 2016.