loss aversion
A cognitive bias where the pain of losing money is felt roughly twice as intensely as the pleasure of equivalent gains, leading to overly conservative or irrational decisions.
Example
“Loss aversion caused him to hold onto losing stocks too long, hoping to 'get back to even' rather than reinvesting elsewhere.”
Memory Tip
LOSS AVERSION = losing $100 hurts TWICE as much as winning $100 feels good. Drives bad decisions.
Why It Matters
Loss aversion significantly impacts investment decisions and wealth building because it causes people to avoid reasonable risks that could generate long-term gains. Understanding this bias helps you recognize when fear is driving your financial choices rather than sound strategy, allowing you to make more rational decisions aligned with your actual goals.
Common Misconception
Many people believe loss aversion only affects inexperienced investors, but research shows even professional investors and wealthy individuals experience this bias when making significant financial decisions. The bias is a fundamental aspect of human psychology that affects nearly everyone regardless of financial expertise or experience level.
In Practice
Suppose you have 100,000 dollars in savings and face two options: keep it in a savings account earning 0.5 percent annually or invest it in diversified index funds historically returning 7 percent yearly. Loss aversion may cause you to choose the savings account because the fear of a potential 10 percent market dip losing 10,000 dollars feels worse than missing out on 6,500 dollars in additional yearly gains, even though the long-term math clearly favors investing.
Etymology
LOSS (something lost) AVERSION (strong dislike, avoidance). The psychological AVERSION to LOSSES.
Common Misspellings
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