Loss Aversion

Loss aversion is the tendency for losing an amount to hurt considerably more than gaining the same amount pleases. Research suggests losses register roughly twice as heavily as gains.

The classic investing mistake it produces is an inability to cut losses. Selling makes the loss final, so the decision is postponed while the loss grows.

The mirror image is selling winners too quickly. Fear of the gain evaporating prompts closing a position on a small rise, producing exactly the wrong pattern: losses held long, gains held briefly.

It can also drive people out of markets altogether. Someone who lost heavily once may avoid investing for years, incurring a larger loss as inflation erodes the purchasing power of cash.

The remedy is setting criteria in advance. Writing down at purchase what conditions would prompt a sale means a loss is judged against that rule rather than against how it feels. Checking the account often strengthens the bias. Look daily and nearly half the days show a loss; look across years and the picture changes entirely.