Loss aversion is the well-documented tendency to feel the pain of a loss more strongly than the pleasure of an equal gain. Losing $100 hurts more than finding $100 feels good. The idea comes from Kahneman and Tversky's prospect theory (1979), often summarized as losses looming roughly twice as large as equivalent gains.
Because a loss feels so bad, investors go to great lengths to avoid realizing one. The classic result is the disposition effect: holding a losing position far too long, hoping it comes back, rather than accepting the loss and moving on. The mirror image is panic-selling at the bottom, when a paper loss becomes unbearable and you lock it in at the worst moment.
Decide your exit before the emotion arrives. Set a stop-loss and take-profit plan when you enter, and judge each decision on the process — was the plan sound? — rather than on how much a red number hurts today. Being aware that recent moves feel more urgent than they are (recency bias) helps too.
It is the tendency, documented in Kahneman and Tversky's prospect theory (1979), to feel the pain of a loss more strongly than the pleasure of an equal-sized gain.
It makes people hold losing positions too long to avoid realizing the loss (the disposition effect), and sometimes panic-sell at the bottom when a paper loss becomes unbearable.
Decide your exit before you enter — a written stop-loss and take-profit plan — and judge decisions on whether the process was sound, not on how much a red number hurts today.
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Educational research only — not investment advice.