Don't Lose Out To Loss Aversion

No one likes losing and will do anything to avoid it. When it comes to investing, losing hurts more and that leads us to situations that are not rational, such as holding on to losses in the hope of regaining our capital.

- Kundan Kishore

This phenomenon or behavioural bias is known as loss aversion. As investors, we all think we are rational, but the truth is, our brains are wired to hate losing more than to enjoy winning.

What is Loss Aversion?

Loss aversion is a concept that was introduced by behavioural economists Daniel Kahneman and Amos Tversky. It refers to the tendency of people to prefer avoiding losses over acquiring equivalent gains. Simply put, the pain of losing *100 is almost twice as powerful as the pleasure of gaining *100. The reason we are so averse to losing is that we feel the pain of loss more acutely than we feel the pleasure of gain.

In investing, this leads to emotional decisions, such as panic selling when there is volatility in the market, holding on to bad investments, or avoiding risk altogether. But none of these reactions will serve your long-term financial goals.