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loss aversion

The tendency to feel a loss more strongly than an equal gain, which makes people hold losers and cut winners.

Loss aversion is the tendency to feel a loss more strongly than a gain of the same size. It can make someone hold a losing position in hope of avoiding a realized loss while closing a winning position too soon.

This response is a human bias, not evidence about what a price will do next. A written plan can set decision rules in advance so that each position is reviewed by the same criteria rather than by the discomfort of a loss.

Loss aversion does not affect everyone in the same way, and noticing it cannot remove market risk. A journal can help compare intended exits with actual decisions over many observations.

Example

In a fictional exercise, the $10,000 Pebble practice account has two separate positions. One shows a $50 loss; the other shows a $50 gain. Nora closes the gain quickly but keeps the loss open, hoping it returns to its entry price.

Working: closing both at those prices would record −$50 + $50 = $0 before costs. Closing only the gain records +$50, while the open position still carries a current $50 loss that can grow or shrink. The example shows how avoiding the feeling of realizing a loss can lead to different treatment of equal amounts.

Common mistakes

  • Treating an unrealized loss as if it will automatically disappear.
  • Closing gains early while giving losing positions extra time without a plan.
  • Assuming emotions reveal what the price will do next.
  • Most people who trade lose money.

Learn it in the course