Studies in Behavioral Economics have shown humans have a pronounced aversion to loss. This is thought to be connected to the loss of food or other resources necessary for survival. This aversion carries forward in modern people as an aversion to financial loss. This is cited as a reason selling stocks at a loss can be difficult for investors. Fear of further loss during a downturn may also cause investors to sell their stake in healthy companies. It appears our brains have built-in wiring that can sabotage some good investment practices. The good news is, if an investor is aware of this tendency it is easier to overcome.
The performance of markets so far this January brings this topic to mind. Before selling positions ask, “Why am I selling?” Is it fear of possible continued loss or because you believe something fundamental about the company has changed? This is one way to help avoid the loss aversion bias in your investment decisions.

Russell Malley
StockCentral Community Leader