Loss aversion: why a loss hurts more than an equal gain pleases

A loss is felt noticeably more sharply than the pleasure of a gain of the same size. The observation is robust and explains several typical errors at once.

How it shows up

A losing position is held so the loss need not be recognised: until it is sold, the loss is "not real".

A winning position is closed early to lock the gain in before it disappears.

Together that produces a portfolio from which the best is systematically removed and in which the worst accumulates.

The endowment effect

A security already in the portfolio seems better than an identical one that is not. The test is simple: would you buy it today at the current price if you did not hold it? An answer of "no" means you are holding it for a non-investment reason.

What helps

An exit rule written before the purchase — A strategy without exit rules is not a strategy.

Regular scheduled rebalancing: it forces selling what rose and buying what fell mechanically — Rebalancing: returning to the target weights.

The tax frame: realising a loss reduces the tax bill, which makes selling less painful — Offsetting losses: how a losing trade lowers the tax.

Related: The share fell: a sequence of questions instead of panic.