Loss Aversion
The behavioral tendency to feel the pain of losses roughly twice as intensely as the pleasure of equivalent gains.
What is Loss Aversion?
Loss aversion, identified by psychologists Daniel Kahneman and Amos Tversky in their Prospect Theory, describes how investors are more sensitive to losses than to gains of equal magnitude — the pain of losing $1,000 feels approximately twice as intense as the pleasure of gaining $1,000. This asymmetry leads to predictable errors: holding losing positions too long to avoid realizing a loss, selling winners too early to lock in gains, and avoiding appropriate risk even when expected value is positive. Loss aversion is one of the most empirically robust findings in behavioral finance.
Example
In a classic experiment, participants would not accept a coin-flip bet to win $150 or lose $100, despite a positive expected value of $25, because the pain of a potential $100 loss outweighed the pleasure of a $150 gain. In investing, this manifests as investors holding a losing stock indefinitely rather than selling and redeploying the capital, hoping to 'break even.'
Source: Kahneman & Tversky — Prospect Theory (1979), Econometrica