Pain of Loss

A nice piece on trading psychology. An excerpt:

Ervolini says market losses affect the brain in the same way excrement or a foul smell does. We recoil without thinking, as if we’re confronted with a disgusting and possibly harmful physical presence. This reaction stems from our unconscious desire to immediately end the pain. “The experience of losing $1 is three times more emotionally impacting than the experience of winning $1,” Ervolini says. “We learn more intensely when we lose.” Because the pain of loss is so much greater than the joy of gains, which Ervolini says affect the same parts of the brain as sex and certain narcotics, people are more likely to hang onto losing investments as they drop and to sell winners before they should. The joy of riding an investment on the way up isn’t enough to overcome the fear we have of losing money if it turns. If it goes up $3, but then drops $1 from its high before we sell it, we feel pain even though we’re able to sell at a profit. That $2 net gain just isn’t enough.

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