The Emotional Rollercoaster of Loss Aversion: Why Your Brain Hates Losing More Than It Loves Winning

Imagine this: you find a $20 bill on the sidewalk - cue the happy dance. Now, imagine you lose that same $20 bill - cue the existential crisis. Despite the monetary value being identical, the emotional impact is vastly different. Welcome to the world of loss aversion, where our brains are wired to feel the sting of loss more acutely than the joy of gain.

What Is Loss Aversion?

Coined by psychologists Daniel Kahneman and Amos Tversky, loss aversion is a cornerstone of behavioral economics. It posits that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. In other words, losing $100 feels like a punch in the gut, while gaining $100 feels like a gentle pat on the back.

Loss aversion is present in many aspects of our financial lives, personal lives, and even professional lives. The refusal to lose (or even accept a loss) can play hell with our success as humans, professionals, and investors alike.

This bias is strong in the personal finance realm. We've all been there and many of us, no matter how many times we experience it, must fight natural instincts and logic to get past it.

Loss Aversion in Personal Finance: The Wallet Woes

1. The "I'll Wait Until It Rebounds" Syndrome

Ever held onto a declining stock for a LONG time, muttering, "It'll bounce back?" That's loss aversion whispering sweet nothings in your ear. Investors often cling to losing assets, hoping to break even, even when evidence suggests it's time to cut losses.

Just ask anyone jamming coins into a slot machine in Vegas. Just a couple more watered-down jack n' cokes (on the house) and I can get my money back, right? 

2. The "Panic Sell" Spiral

Market dips can trigger panic selling, driven by the fear of further losses. Ironically, this often results in selling at a low point, only to watch the market rebound shortly after. 

I have seen this infect some of the most disciplined investors. 2020 was more than just an inadvertent human behavior experiment due to Covid, but also a test of how human investors react when instant panic hits the airwaves - and their portfolios drop like a lead balloon.

2008 saw similar behavior. Surprisingly, the first quarter of 2025 saw a lot of the reverse while markets tanked. Many investors reversed course and instead of selling - they bought. Have we finally turned a corner with investor behavior? I won't hold my breath. But maybe demographics and experiencing frequent market shocks are sticking with investors more than they had in the past. Tough times are also teachable moments.

3. The "Too Safe to Succeed" Strategy

Some investors, scarred by past losses, become overly conservative, parking funds in low-yield accounts or under the mattress. While this feels safe, it can hinder long-term growth, especially when inflation outpaces returns.

This strategy runs rampant in careers as well. Stay safe, be comfortable. To each their own. Regret is also a form of loss so tread lightly.

This chart below from Blackrock has always provided a great visual when discussing loss aversion. Every dip in this chart triggered someone's emotions to sell. They tried to avert the loss. Although most just locked it in forever - baking a layered cake of regret.

Embrace and Learn from the Emotional Journey

You are going to lose, at some point, from something you can't control. Luckily, when we see losses on paper via our investment account statements, this is money we never had. It wasn't a wad of cash in your hand that was ripped away. In the words of Matthew McConaughey in the movie The Wolf of Wall Street, paper gains or losses of investments are''Fugayzi, fugazi. It's a whazy. It's a woozie. It's fairy dust. It doesn't exist. It's never landed. It is no matter. It's not on the elemental chart. It's not f*$^@#g real.' They only become real when you sell them.

Most of us own cars and most of us lose money every day via depreciation. Unless of course you own cars that gain in value. If this is the case, we should go grab a coffee. The car provides a value to us every day. Maybe that is why we overlook the loss?

Ever owned a boat? It is literally a vessel to transport your money to the bottom of the ocean. But it provides joy, so we own them.

Stocks are tough. We can't drive them. We can't cruise in the Gulf of America with them. And they certainly don't keep us warm at night. Maybe that is why loss aversion is as human as checking the fridge one last time, making sure no new snacks have appeared.

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Sources:  WIRED, Investopedia.  Dividend Strategy, Vrid, AI Manager Coach, KLD Wealth Management, Blackrock