Definition
Loss Aversion
Loss aversion is the well-documented tendency for the pain of a loss to feel roughly twice as powerful as the pleasure of an equivalent gain.
Because losing ₹10,000 hurts more than gaining ₹10,000 feels good, investors take irrational steps to avoid booking a loss — they hold falling stocks too long hoping to break even, and sell winners too soon to 'lock in' a gain. This same asymmetry keeps people in underperforming funds and overweight in fixed deposits whose real returns may be negative after inflation and tax.
Loss aversion is the engine behind several other biases, including the disposition effect and the sunk cost fallacy. Recognising it helps: framing a temporary drawdown as the normal cost of long-term equity returns, and using rules-based exits (stop-losses or rebalancing bands) reduces the chance that fear of a paper loss drives a poor real decision.
Related terms
- Prospect TheoryProspect theory, developed by Kahneman and Tversky, describes how people actually evaluate risky choices — judging outcomes as gains or losses from a reference point rather than in terms of final wealth.
- Disposition EffectThe disposition effect is the tendency to sell winning investments too early to bank a gain, while holding on to losing investments too long to avoid realising a loss.
- Sunk Cost FallacyThe sunk cost fallacy is the mistake of continuing with a losing investment or commitment because of the money, time or effort already spent, rather than judging it on future prospects.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.