Loss aversion is a behavioral finance principle indicating that losses have a more significant emotional impact on individuals than equivalent gains.
Loss aversion suggests that the pain of losing money is psychologically about twice as powerful as the pleasure of gaining the same amount. This leads investors to make irrational decisions to avoid losses, such as holding onto losing investments longer than they should or selling winning investments too early. Understanding loss aversion can help individuals make more rational investment choices and ultimately achieve financial freedom by mitigating the emotional barriers that lead to poor financial decisions.
The fear of losing is more powerful than the desire to gain.
