§ 01
Pain of losing $100 ≈ 2× Pleasure of gaining $100
§ 02
| Loss Aversion Effect | What Investors Do | Rational Alternative |
|---|---|---|
| Hold losers too long | Refuse to sell at a loss, hoping for recovery | Sell if thesis is broken regardless of P&L |
| Sell winners too early | Take profits at +10% to avoid giving back gains | Let winners run if fundamentals support higher prices |
| Avoid all risk | Stay in cash because markets ‘might crash’ | Accept volatility as the price of long-term returns |
| Disposition effect | Net result: portfolio of losers, sold all winners | Costs 2–4% annually in risk-adjusted returns |
§ 03
The disposition effect (selling winners, holding losers) is the single most expensive behavioral bias for individual investors. It’s driven purely by loss aversion — the pain of realizing a loss is so intense that investors avoid it at any cost.
§ 04
Review your trade history. Have you ever held a losing position far longer than a winning one? Have you sold a stock at +15% that later went up 100%? These are loss aversion signatures.
§ 05
A stock you own is down 30%. The fundamentals have deteriorated. You think ‘I’ll sell when it gets back to even.’ What’s wrong with this thinking?
§ 06
Five questions · AI feedback
Sit with the ideas.
You hold two positions: Stock A is up 40% with strengthening fundamentals; Stock B is down 25% with weakening fundamentals. You need to raise cash by selling exactly one. Which do you sell?
Why: