Loss Aversion

Loss aversion is the tendency to experience losses more strongly than comparable gains, which can distort otherwise consistent financial decisions.

A trader may hold a losing position to avoid recognizing the loss, close a winner too early, or take excessive risk to return to break-even. These choices can violate the original risk-reward assumptions and turn a manageable loss into a larger one. Predefined exit criteria, position limits, and decision journals can make the bias visible, though they cannot guarantee disciplined action or profitable outcomes.