DEFINITION

Loss Aversion

The psychological tendency to weigh losses as roughly twice as painful as equivalent gains. Causes traders to hold losers and exit winners prematurely.

In depth

Documented by Kahneman and Tversky. The asymmetric pain explains why traders cut winners early (locking in any gain) but ride losers (hoping to avoid the realized loss).

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Related terms

Disposition Effect

The tendency to sell winners too early and hold losers too long. One of the most documented behavioral biases in retail trading.

Sunk Cost Fallacy

Continuing to hold a losing trade because of capital already invested, rather than evaluating the trade on its current merits.

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