Losses hurt approximately twice as much as equivalent gains feel good, making people risk-averse for gains and risk-seeking for losses.
Investors hold losing stocks too long (selling means realizing the loss) and sell winners too quickly (locking in gains). People reject positive expected-value bets because the potential loss looms larger than the potential gain.
Loss aversion is irrational and should be overcome—it's a fundamental feature of how we experience value, and sometimes it's adaptive (losses often have more severe consequences than equivalent gains).
Thinking, Fast and Slow
Daniel Kahneman
People evaluate outcomes relative to a reference point rather than in absolute terms, are loss-averse, show diminishing sensitivity, and overweight small probabilities.
Outcomes are evaluated relative to a reference point (usually the status quo) rather than in absolute terms, making framing crucial.
People demand more to give up something they own than they would pay to acquire it, because giving it up feels like a loss.
People evaluate outcomes relative to a reference point rather than in absolute terms, are loss-averse, show diminishing sensitivity, and overweight small probabilities.
Outcomes are evaluated relative to a reference point (usually the status quo) rather than in absolute terms, making framing crucial.
How does loss aversion explain why people are risk-averse for gains but risk-seeking for losses?
How does understanding loss aversion improve the effectiveness of habit tracking from Atomic Habits?