Loss Aversion versus Risk Aversion

http://www.ppfas.com/media/articles/how-the-wish.pdf


"It makes sense to ride the winners and sell the losers, but loss aversion makes people do the exact opposite."

Why do most portfolios have a few winners but a long list of losers? Why are your profits from your winners smaller than your losses from your losers? Due to loss aversion, investors sell their winners fast and hold on to the losers. Investors behave as if the loss occurs when the sale is made, when in fact the loss has already occurred, with the depreciation in price. Offsetting a loss against other income has tax benefits, too - it makes good sense to ride the winners and sell the losers. But loss aversion makes people do the exact opposite.