People who are affected by loss aversion have an absolute preference for avoiding losses rather than acquiring gains. For most people, losing $100 is not the same as not winning $100. However, from a rational point of view the two things are the same: They both represent a net negative change of $100. Research has suggested that
losses can have as much as twice the psychological power of gains.
In terms of trading, loss aversion affects one’s ability to follow mechanical trading systems because the losses incurred in following a system are felt more strongly than are the potential winnings from using that system. People feel the pain of losing much more strongly when they follow rules than they do when they incur the same losses
from a missed opportunity or by ignoring the rules of the system. Thus,
a $10,000 loss is felt as strongly as a $20,000 missed opportunity.
losses can have as much as twice the psychological power of gains.
In terms of trading, loss aversion affects one’s ability to follow mechanical trading systems because the losses incurred in following a system are felt more strongly than are the potential winnings from using that system. People feel the pain of losing much more strongly when they follow rules than they do when they incur the same losses
from a missed opportunity or by ignoring the rules of the system. Thus,
a $10,000 loss is felt as strongly as a $20,000 missed opportunity.
