Loss aversion is a psychological principle that describes how individuals tend to prefer avoiding losses rather than acquiring equivalent gains. According to this concept, losing $100 feels more painful than the pleasure derived from gaining $100. This phenomenon is a central idea in prospect theory, which suggests that people evaluate potential losses and gains differently, leading to the conclusion that losses weigh heavier on decision-making processes.
In practical terms, loss aversion can manifest in various ways, such as in investment behavior where individuals might hold onto losing stocks longer than they should, hoping to avoid realizing a loss. This behavior can result in suboptimal financial decisions, as the fear of loss can overshadow the potential for gains. Ultimately, loss aversion highlights the emotional factors that influence human behavior, often leading to risk-averse choices in uncertain situations.
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