What is loss aversion bias?

Loss aversion bias is a cognitive phenomenon where a person would be affected more by the loss than by the gain, i.e., in economic terms, the fear of losing money is greater than gaining money. Therefore, a bias is present to avert the loss first. The first preference of an individual would be to avoid loss. Then they would into tracking the gain.

How do you protect against loss aversion bias?

That’s what loss aversion looks like in practice. Well, how do you guard against the loss aversion bias? One practical step is to always use firm stop-loss orders to minimize your potential loss in any trade. That kind of pre-commitment to always limiting your risk helps to mitigate the tendency to fall into a loss aversion trap.

What is the difference between loss attention and loss aversion?

What distinguishes loss attention from loss aversion is that it does not imply that losses are given more subjective weight (or utility) than gains. Moreover, under loss aversion losses have a biasing effect whereas under loss attention they can have a debiasing effect.

What does loss aversion look like?

The negative effect of this, of course, is that investors often continue to hold onto losing investments much longer than they should and end up suffering much bigger losses than necessary. That’s what loss aversion looks like in practice. Well, how do you guard against the loss aversion bias?