Loss aversion
TheoryDefinition
The cognitive bias that losses sting roughly twice as much as gains of the same size feel good. Underlies why investors panic-sell in drawdowns, refuse to realize losses ("disposition effect"), and chase performance after big up-moves.
Practical implication: leverage amplifies emotional pain disproportionately. A 50% drawdown produces psychological torment far worse than a 50% gain produces elation. Most retail blow-ups happen at the bottom because loss aversion wins out over rational rebalancing.
Practical implication: leverage amplifies emotional pain disproportionately. A 50% drawdown produces psychological torment far worse than a 50% gain produces elation. Most retail blow-ups happen at the bottom because loss aversion wins out over rational rebalancing.