The psychological tendency for people to feel the pain of a loss roughly twice as strongly as the pleasure of an equivalent gain.
Identified by psychologists Daniel Kahneman and Amos Tversky as part of Prospect Theory (which won Kahneman the Nobel Prize in Economics), loss aversion explains many irrational financial behaviors. It causes investors to hold losing positions too long (hoping to break even) while selling winners too quickly (locking in gains). This pattern, known as the disposition effect, directly harms returns. Loss aversion also explains why many people avoid stocks entirely despite their superior long-term returns: the emotional pain of watching a portfolio decline 20% outweighs the rational understanding that markets recover over time.