Loss Aversion Eats Into Your Returns
The joy of earning about $74 versus the pain of losing about $74, which is greater? Studies show the pain of a loss is about twice as strong as the joy of a gain.
What Is Loss Aversion?
According to Kahneman and Tversky's Prospect Theory (1979), people feel losses and gains of the same size differently. The psychological pain of a loss is about 2-2.5 times stronger than the joy of a gain.
Example: a coin flip. Heads gives a gain of about $1,100, tails a loss of about $740. The expected value is about +$185, a positive, yet most people decline this game. That's because the pain of losing about $740 feels greater than the joy of gaining about $1,100.
How Loss Aversion Shows Up in Investing
1. Panic selling in a loss range: when a stock falls -20%, the impulse is "I have to sell before it drops more." But over the long run, a recovery to prior highs occurs in many cases.
2. Holding losers, selling winners: reluctant to lock in a loss, you keep holding the losing stocks and quickly lock in the winners. In the end, only bad assets remain.
3. Excessive preference for safe assets: out of fear of volatility, you raise the weight of cash or deposits too high, lowering your long-term real return.
Historically, the S&P 500 rose in about 75% of years. If you avoid long-term investing out of fear of short-term declines, you give up the gains of that 75% of rising years.
How to Overcome Loss Aversion
It is hard to overcome completely, but you can respond with systems.
1. Automation: setting up DCA as an automatic transfer means investing happens every month without checking the market. 2. Reduce checking frequency: checking your portfolio daily makes you sensitive to short-term losses. Reducing it to once a month or once a quarter helps. 3. Use historical data: knowing in advance the data on past crashes and recoveries lets you view current losses differently. This service's crisis scenario page is for exactly this.
常见问题
Q. Is loss aversion the same for all investors?
The degree differs by individual. The more investing experience you have and the better you know historical data, the less loss aversion tends to affect you. Loss aversion also operates less when you invest with spare funds whose loss would not affect your daily life. The advice to "invest only what you can afford to lose" is grounded here too.
Q. Are there cases where loss aversion works positively?
Yes. It helps prevent taking excessive risk. It naturally puts on the brakes so you don't invest your entire fortune in high-risk assets. The problem is when this bias operates too strongly and makes you reject even a reasonable level of risk.
📋 结果基于历史数据计算,过去的收益不代表未来的收益。
📋 本服务旨在帮助理解投资、供教育之用,并非投资建议。