Loss aversion makes investors hold on to losing investments for too long from "summary" of The Little Book of Behavioral Investing by James Montier
Loss aversion is a powerful force that can lead investors down a dangerous path. When faced with the prospect of selling a losing investment, many investors experience a strong emotional pull to hold on in the hopes that the investment will eventually turn around. This tendency to avoid realizing a loss is a common cognitive bias that can have detrimental effects on investment performance. The fear of regret plays a significant role in this phenomenon. Investors are often haunted by the thought that if they sell a losing investment, it will quickly rebound, causing them to miss out on potential gains. This fear of making the wrong decision can paralyze investors and prevent them from taking appropriate action to mitigate losses. Additionally, investors tend to place more weight on losses than gains of the same magnitude. This asymmetry in the way losses and gains are perceived can lead investors to irrationally hold on to losing investments for longer than they should. The pain of losing money is often more intense than the pleasure of making money, causing investors to act in ways that are not in their best financial interests. Overcoming loss aversion requires discipline and a willingness to face the reality of a losing investment. By setting clear investment goals and establishing a predetermined exit strategy, investors can avoid falling victim to the emotional traps that can derail their financial success. It is important to remember that losses are a natural part of investing, and holding on to a losing investment in the hopes of recouping losses is not a viable long-term strategy.
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