Description: Loss aversion is a psychological concept that describes people’s tendency to prefer avoiding losses rather than acquiring equivalent gains. This phenomenon is based on the idea that losses have a stronger emotional impact than gains of the same magnitude. In the context of investments, this aversion can influence decision-making, where investors may be reluctant to sell assets that have lost value, even if long-term prospects are positive. Loss aversion can lead to behaviors such as ‘investment inertia,’ where individuals hold onto declining assets in an attempt to avoid realizing a loss, which can result in suboptimal decisions. This cognitive bias can also manifest in how investors react to market volatility, where price fluctuations can provoke fear and anxiety, leading to impulsive decisions. In summary, loss aversion is a crucial factor that affects investor behavior, shaping their decisions and investment strategies.
