Loss aversion in trading: why you cut winners and hold losers

Imagine the country is bracing for a disease outbreak.

600 people are expected to die.

Two programs are on the table, and you have to pick one:

• Program A: 200 people are saved.
• Program B: 1/3 chance that all 600 are saved. 2/3 chance no one is saved.

Which one did you pick? Remember it.

Now here are two more options.
Same deal, pick one:

• Program C: 400 people die.
• Program D: 1/3 chance no one dies. 2/3 chance all 600 die.

Which one did you pick?

If you picked A and then D, you’re with the majority.

But, here’s the trick with this question…

A and C are identical, and believe it or not, so are B and D.

Same outcomes, just different wording…

When Tversky and Kahneman (the behavioural scientists who came up with the question) ran this, 72% picked A, and 78% picked D.

The reason is loss aversion… Frame it as gains, and people grab the sure thing.

Frame it as losses, people gamble to avoid the hit.

The pain of losing feels bigger than the pleasure of winning the same amount.

And here’s why that’s important for us traders:

• A position up £800 feels like a sure thing worth protecting. So we snatch the profit.
• Same position down £800 should feel like a sure loss worth taking… but our brain reframes it as “a chance to get back to zero.”

Suddenly we’re holding and hoping…

This is precisely why the majority of traders have losers bigger than their winners…

It’s just simple biology. Until you learn to rewire your brain, you’ll be running on the original operating system…

And the fix isn’t instant. That’s why traders find it such a tough nut to crack… you’re fighting the very fabric of your brain.

But just know… you’re not alone, and this is how “normal people” think…it takes time to change how you behave, but it does come eventually.

(One thing that helps… write your stop and target down before you enter. Get the decision made before the frame can mess with you.)