"Fight or Fright" Response

When the stocks drop, that financial loss fires up your amygdala - the part of the brain that processes fear and anxiety and generates the famous "fight or flight" response that is common to all cornered animals. Just as you can't keep your heart rate from rising if a fire alarm goes off, just as you can't avoid flinching if a rattlesnake slithers onto your hiking path, you can't help feeling fearful when stock prices are plunging."

In fact, the brilliant psychologists Daniel Kahneman and Amos Tversky have shown that the pain of financial loss is more than twice as intense as the pleasure of an equivalent gain. Making $1000 on a stock feels great - but a $1000 loss wields an emotional wallop more than twice as powerful.

Losing money is so painful that many people, terrified at the prospect of any further loss, sell out near the bottom or refuse to buy more.