Loss Aversion in Investing

Investors hold losing stocks far too long and sell winners far too quickly. Locking in a loss by selling feels worse than watching a paper loss keep growing, so people freeze exactly when they should act.

This pattern, called the disposition effect, costs investors significant returns over time. Professional traders learn to fight this instinct, but even experts struggle with it. Loss aversion explains why stock market crashes trigger panic selling at exactly the worst moment to sell.