Loss Aversion
The psychological reality that losses hurt roughly twice as much as equivalent gains feel good — distorting risk decisions across the board.
Loss aversion is one of the most thoroughly documented findings in behavioural economics. Losing $500 is approximately twice as painful as winning $500 is pleasurable. This asymmetry is baked into human wiring — it made sense on the savannah; it is a liability in markets.
It causes traders to hold losing trades too long (refusing to realise the loss and make it "real") while cutting winning trades too early (locking in the good feeling before it disappears). The result: small gains and large losses — the exact opposite of what a positive-expectancy strategy requires.
Awareness alone is not enough. You need mechanical rules: stops that exit automatically, profit targets that trigger partial sells. Remove the real-time emotional decision from the equation wherever possible.