The stock market losses over the last several days leads some individual investors to panic and start selling, or if they don’t sell, they moan and groan about the losses.
The problem is that the losses are relatively small, but feel like they are bigger than they really are. And the loss feels twice as painful as the equivalent gain would feel joyous. So we freak out.
This is the basis for a well-demonstrated cognitive bias called “loss aversion” in psychology. Justin Wolfers writes about it in the New York Times, and gives credit to the Nobel prize winning psychologist Dan Kahneman, developer of prospect theory.
Link to How Emotion Hurts Stock Returns – The New York Times.