Loss aversion

Trader's Glossary · Psychology

Definition. The tendency to feel losses more strongly than gains of the same size. Research suggests a loss hurts roughly twice as much as a comparable gain pleases.

How it works

Daniel Kahneman and Amos Tversky described it in prospect theory (1979). In trading it shows up as difficulty accepting losses and a willingness to take risks to “get back to break-even”.

Example

After a loss a trader makes an off-plan decision whose only purpose is to win the loss back the same day.

What to watch out for

Checking your P&L often strengthens loss aversion. What helps is judging the process over a series of decisions, not a single trade.

More in Hetman Capital Club

You'll find the full explanation with graphics, examples and exercises in the 🧘 Trader's body and mind space, and its use in the live market in the 🔴 Live Room. Both are available to Club members (in Polish).

Educational content, not investment advice.

Full article in the Atlas of biases: what this bias looks like in trading, an example and the research.