Loss aversion

Atlas of Cognitive Biases #34 · Gains, losses and risk. A loss hurts about twice as much

What it looks like in trading

• holding losing positions so as not to “realise” the loss
• moving the stop
• avoiding good opportunities after a loss

An example from a session

A position is at −0.8R. Instead of taking the loss as planned, the trader moves the stop because “it'll come back any minute”. A −1R loss turns into −2.5R.

What the research says

Kahneman and Tversky (1979) described loss aversion in prospect theory. Tversky and Kahneman (1992) estimated that for a typical person a loss weighs about 2.25 times as much as a gain of the same size.

The shield: how to defend yourself

• the loss planned before entry, in R
• rule: the stop can only be tightened, never widened
• accepting losses as a cost of doing business

Exercise

For a week, tag every situation in your journal where you notice this bias in yourself with #34, even when it didn't affect your decision. After the week, count them and write down the conditions in which it appeared most often.

Educational content, not psychological advice or an investment recommendation. You make every decision yourself, in line with your own plan.

Related biases

• The disposition effect (#36)
• The reflection effect (#35)
• Myopic loss aversion (#43)

Frequently asked questions

Educational content, not psychological advice or an investment recommendation.