Trading Psychology
Loss Aversion — Definition & Example
The well-documented tendency to feel losses about twice as strongly as equivalent gains.
Loss aversion, formalised in prospect theory by Kahneman and Tversky, is a cognitive bias where the pain of a ₹1,000 loss exceeds the pleasure of a ₹1,000 gain by roughly 2:1. In trading, this drives premature profit-taking (locking small wins to feel good) and excessive loss-holding (deferring the realisation pain). The disposition effect is loss aversion in action.
Example
A trader closes a +5% winner at the first wobble (locking the good feeling) but holds a -8% loser for weeks (deferring the bad feeling). Both decisions feel right in the moment but together create asymmetric R:R that destroys long-term P&L.
Related
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