Loss Aversion
The tendency to feel the pain of a loss more strongly than the pleasure of an equivalent gain.
Formula
Test: the compensation demanded to accept a possible loss exceeds the loss's size, typically by a factor near two
Unit
ratio (x, times)
In depth
Experimental work puts the ratio around two to two and a half, meaning a ₹10,000 loss hurts roughly as much as a ₹22,000 gain pleases. This asymmetry drives holding losers too long, refusing to buy after a decline, and holding too little equity for one's horizon. It is not the same as risk aversion: a loss-averse person may take a large risk to avoid crystallising a loss, which is risk-seeking behaviour. The practical countermeasure is to evaluate the portfolio rather than individual positions, and less frequently, which reduces how often a loss is registered at all.
Worked example
An investor refuses a coin flip paying ₹22,000 for heads and losing ₹10,000 for tails, despite an expected value of plus ₹6,000. The arithmetic is favourable; the felt asymmetry is what declines it.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Loss Aversion” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.