Forex glossary
Loss Aversion
Loss aversion is the tendency to weight losses more heavily than comparable gains relative to a reference point. It is not a universal multiplier of emotional intensity. In trading, it may make a planned loss harder to accept; holding a losing position alone does not establish the mechanism without examining the plan and reasons.
Illustrative example
How does it work in practice?
In a hypothetical exercise, a 100 PLN loss prompts a trader to abandon an agreed stop-loss, while an equal gain had not changed the rules. This illustrates unequal weighting of outcomes, not a measurement of emotional pain.
A case to work through
Equal amounts, different rules
In a fictional exercise, the plan is identical at +40 and −40 PLN, but the participant changes it only after the loss.
- Record the original rule and reason for changing it.
- Check whether new information or merely the result's sign explains the difference.
What follows? Do not assign emotions a universal multiplier.
Example boundary: This illustrates behaviour rather than diagnosing a person.
A useful distinction
Loss Aversion / Revenge Trading
Revenge trading concerns recovering losses quickly; loss aversion concerns losses' relative weight.
Check your understanding
Compare reactions to equal results without quantifying emotions.
Show the answer and explanation
No, do not apply a fixed personal multiplier
A tendency does not quantify an individual's emotions.
Recording and assessing decisions
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Related terms
Sources and documentation
- Prospect Theory: An Analysis of Decision under Risk – Kahneman and Tversky
Describes evaluating gains and losses relative to a reference point.
Document read: - Step 5. Keep a Trade Log – CME Group
Describes recording reasoning, plans and execution and reviewing trades.
Document read:
The example illustrates the mechanism. Check current account conditions and instrument specifications with the provider.