Loss Aversion

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Definition

The tendency to feel an investment loss more intensely than one feels a commensurate investment gain. One of a group of Behavioral Financial Biases that can cloud investors’ judgment. Loss Aversion can distort an investor’s behavior in a number of ways: causing undue caution and thus limiting returns; and failing to appreciate what are actually substantial gains. The characteristic is magnified in older individuals, those in or near retirement, and they may feel a loss ten times more than they feel a commensurate gain.

If they can’t be educated to more evenly feel losses and gains, investments may need to be structured to avoid substantial losses.

Which Would You Feel More Intently?

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