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Loss Aversion

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Table of contents
    1. 0.2. How It Works
    2. 0.4. Why It Matters

Loss aversion is a psychological concept where individuals prefer avoiding losses over acquiring equivalent gains. In trading, it means traders are often more affected by losses than by potential gains, influencing their decision-making.

How It Works

In the context of investing or trading, loss aversion may lead to holding onto losing positions too long or selling winning positions too early, in an effort to avoid the pain of realizing a loss. This can skew investment decisions and hurt overall performance.

Why It Matters

Loss aversion is important in understanding investor behavior. Recognizing this bias can help traders make more rational decisions and avoid emotional mistakes that negatively impact returns.