Loss aversion is the tendency to give greater psychological weight to a loss than to a comparable gain. In trading language it names a possible decision bias, not the mere fact that a position is losing money.
How the term is used
Traders speak of loss aversion when fear of realizing a loss delays a decision that the plan already required, or when a profitable position is closed very early only to make the gain certain. “I will wait until it returns to my entry” may be compatible with the bias, but the sentence alone does not prove it.
Technical limit
Loss aversion comes from prospect theory, but it does not assign the same sensitivity to everyone and does not predict markets. New information, costs, taxes, or a risk plan can explain a similar decision. Assessment requires a comparison with rules set before the trade and with repeated behaviour. The full loss aversion entry covers the mechanism, examples, and safeguards.
Sources
- CFA Institute, The Behavioral Biases of Individuals — Frames cognitive and emotional biases and approaches to recognizing or adapting to them.
- Daniel Kahneman and Amos Tversky, Prospect Theory: An Analysis of Decision under Risk — Foundational study of how gains and losses are valued under risk.