Loss aversion

The tendency for a loss of a given size to feel considerably worse than a gain of the same size feels good.

Example

Losing $1,000 typically produces a stronger reaction than gaining $1,000. The amounts are identical; the feelings are not.

Important

Loss aversion is about the feeling, not the arithmetic. It pushes people to sell winners early to bank a certain gain, and to hold losers indefinitely to avoid making the loss final.

Related terms

• Disposition effect — The observed pattern of selling investments that have risen while holding on to those that have fallen.
• Permanent loss of capital — Money that is gone for good - the business failed, the asset became worthless, or it was sold at the bottom and never bought back.
• Volatility — How much and how often an asset's price moves, up or down, over a given period.

Lessons that explain it

• The mistake library — Losses are cheaper to learn from when they are someone else's. This is the practice of keeping a written record of both kinds so the same error cannot arrive twice wearing a different name. (13 min)
• Loss aversion — Losing hurts roughly twice as much as the same gain feels good, and that asymmetry pushes investors into two opposite errors depending on which way the position has moved. (11 min)

All 578 terms in the Investing glossary