Loss aversion

A result from the study of decision making under risk rather than a trading maxim. Experimental work found that the discomfort attached to losing an amount exceeds the satisfaction attached to gaining the same amount, and that choices become risk seeking once a position is framed as a loss to be recovered rather than as a sum to be protected. The finding is about how an outcome is framed, which is why the same position can be assessed differently depending on the reference point it is compared against.

The two behaviours it is offered to explain look like opposites and come from one source: adverse positions held past the level at which they were meant to close, and favourable positions closed before the level at which they were meant to close. Both convert an uncertain outcome into a certain one in the direction that feels least uncomfortable at the moment of the decision. Closing an adverse position makes an unrealised loss realised, which the framing resists; leaving a favourable one open risks giving back a gain already counted.

The conventional response is procedural rather than motivational, because a bias identified in the moment is not thereby removed. Writing the exit levels down before the position exists fixes them at a time when no outcome is yet attached to them, and a trading journal kept in two halves separates the reasoning from the result for the same reason. Neither claims to change how the decision feels.