Atlas of Cognitive Biases #39 · Gains, losses and risk. After a loss you fear good opportunities
What it looks like in trading
skipping planned setups after a losing streak
exiting winners too early after a loss
“this time I'll wait for more confirmation”
An example from a session
After a day with a big loss, a trader takes none of their planned trades for a week, “because they're not sure”. Good opportunities pass and frustration grows. The exposure ladder: Mental workshop #12.
What the research says
Thaler and Johnson (1990) observed that after a loss, participants avoided risk if the bet offered no chance of winning the loss back. It's the other side of the break-even effect: the same loss can lead to recklessness or to paralysis.