Who it's for — Anyone who knows they «should» cut losses but drags them, or closes winners too early to «lock in» a small gain.
Loss aversion describes the psychological asymmetry: losing €100 hurts more than gaining €100 feels good. Central to prospect theory, it explains typical trading behaviour: refusing the stop-loss, holding losing positions, exiting winners early.
In plain terms — The pain of a loss drives choices more than the pleasure of an equal gain. Source of paper hands, bagholding, and «I'll wait until break-even».
Trading effects
| Behaviour | Mechanism |
|---|---|
| Holding losers too long | Avoid «realizing» the loss |
| Cutting winners too soon | Lock gain before it can reverse |
| Moving the stop | Postpone the painful moment |
| Size up after a loss | Try to recover immediately |
Common mistake — «I won't close until I'm back to even» — you turn a small manageable loss into a deep drawdown.
Example — Trade −2% with plan stop at −2.5%: you move stop to −5% «to give it room». Loss aversion overrode risk management written in your playbook.
Summary card
- What it is: gain vs loss asymmetry in perceived value.
- Antidote: preset stops, fixed size, checklist.
- Hub: Trading psychology.