• If the same stock was bought at $100 and the current price is trading at $70, an investor could hold on to it until its price goes back up to $100 despite what the market says.
How to Avoid:
• Think about the present situation and possible future instead of focusing on past prices.
• Objective ways of valuing the security include discounted cash flow and P/E ratios.
3. Loss Aversion
Loss aversion is the tendency to prefer avoiding losses over acquiring equivalent gains. Investors feel the pain of a loss more acutely than the pleasure of a gain.
• If the same stock was bought at $100 and the current price is trading at $70, an investor could hold on to it until its price goes back up to $100 despite what the market says.
How to Avoid:
• Think about the present situation and possible future instead of focusing on past prices.
• Objective ways of valuing the security include discounted cash flow and P/E ratios.
3. Loss Aversion
Loss aversion is the tendency to prefer avoiding losses over acquiring equivalent gains. Investors feel the pain of a loss more acutely than the pleasure of a gain.