Understanding Loss Aversion

Loss aversion is a common behavioral bias. Research suggests that the pain of losing is twice as powerful as the pleasure of gaining.

Loss aversion prevents us from the economically rational decision as you can see from the two questions in the mini-questionnaire to detect loss aversion.

Amateurs and professional investors alike suffer from loss aversion. In fact, rogue traders are more often the result of loss aversion than evil. It often starts with a small loss, and in an effort to cover it up, the trader would double down and take more risk, digging a bigger and bigger hole for themselves.

By Helen Yang, CFA

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