All in a day's work

How important is it to understand this aspect of yourself when it comes to your investing/ trading strategy.

"More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason." -- Philip Fisher

Loss aversion refers to the tendency for people to strongly prefer avoiding losses than acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains.

Investors have been shown to be more likely to sell winning stocks in an effort to "take some profits," while at the same time not wanting to accept defeat in the case of the losers.

It also doesn't help that we tend to feel the pain of a loss more strongly than we do the pleasure of a gain. It's this unwillingness to accept the pain early that might cause us to "ride losers too long" in the vain hope that they'll turn around and won't make us face the consequences of our decisions.

The mental framework of an individual is very important is this aspect.

Think of the following:

1. Would you rather get a $2 discount, or avoid a $2 ERP surcharge?

2. Will you lose more satisfaction if you made a loss of $1000 than gain satisfaction from a profit of $1000. In absolute terms, the figures are the same.