Loss aversion: why a $100 loss hurts more than a $100 gain feels good

Here is a question I have been turning over since I left my tech job in September: why does a red number in my portfolio stay in my head for days, while a green number of the same size barely registers by dinner?

It is not just me being dramatic. There is a name for it, and once I could name it, I started noticing it everywhere. It is called loss aversion.

What is loss aversion?

Loss aversion is the tendency to feel the pain of a loss more strongly than the pleasure of an equal gain. The idea comes from the work of Daniel Kahneman and Amos Tversky, who described it as part of prospect theory. The rough rule of thumb is that losses feel about twice as strong as gains of the same size. It is a pattern in how people tend to behave, not an exact law, and it varies from person to person.

So a $100 loss does not just cancel out a $100 gain. On the scoreboard in your head, the loss weighs more.

What does it look like in everyday life?

Imagine you find a $10 note in an old jacket pocket. Nice little surprise. You smile, maybe you buy a coffee, and that is the end of it.

Now imagine you take a $10 note out of your wallet and it slips out of your pocket on the way to the bus stop. Same $10. But that one nags. You retrace your steps in your head. You tell yourself you should have zipped the pocket.

The money is identical. The feeling is not. That gap is loss aversion, and it is the reason a small loss can ruin a good afternoon when a small win never made one.

How does it show up in my investing?

A few of the things I have written about on this blog make a good case study.

I took a loss on an energy ETF, which I wrote about in The Sunk Cost Fallacy in Investing. I felt frustrated when it dropped, and losses like that tend to hang around in your head far longer than they should.

I also remember March 2020, when I bought the dip with my salary. Buying in a falling market goes against the instinct that loss aversion pushes you towards, which is to stop the pain by selling or staying away. Now that I no longer have a salary, I think twice about buying a dip. Part of that is simple arithmetic. A salary refills the tank every month, and a portfolio does not.

And then there are my CSPX shares. I hold about 218 of them. I have never sold them, and I keep them for growth. When the market wobbles, “just sell, make it stop” is the voice loss aversion uses. Knowing why you own something makes that voice easier to hear without obeying it.

Why does it matter more when I live off my portfolio?

When I had a salary, my portfolio was a long-term pot and my income came from my job. Now I live off my portfolio, from dividends, covered call ETFs and selling options. The portfolio goes up and down, and there is no consistent income coming in. I used to earn a five-figure monthly paycheque, so I know what regular looks like.

For anyone living off a portfolio, a drop on screen can feel aimed at their actual income. That is precisely when loss aversion is loudest, and also when a panicked decision costs the most. So it helps to have a few rules in place that stop feelings from running the account. Which brings me back to thinking twice about buying a dip. For me, a big one is knowing what I am buying. That way I can tell whether a dip is fundamental or temporary, which makes dips easier to sit through.

How does loss aversion lead to bad money decisions?

There are a few classic traps.

Selling winners too early and holding losers too long

Locking in a gain feels good, so it is tempting to cash out quickly. Selling a loser makes the loss real, so it is tempting to wait and hope. Over time that can work against you. I wrote about the holding side of this in The Sunk Cost Fallacy in Investing. Loss aversion and sunk cost often travel together: “I have already lost so much, so I cannot sell now.”

Playing it too safe

If every dip feels like a punch, it is easy to keep too much sitting in places that feel safe but quietly lose to inflation. Avoiding a visible loss can mean accepting an invisible one.

Checking too often

The more often you look at a portfolio, the more often you see a red number. Looking daily means meeting the pain of small dips again and again, even if the long-term line is going up.

Fear of the next job move

I do not think this is only about investing. I wrote about it in I will be laid off. The lesson I took from being retrenched was that you are just a number to the company. Staying somewhere because leaving feels like a loss, even when the place does not value you as much as you value it, is loss aversion in a work shirt.

How do I deal with it in practice?

I do not think you can switch loss aversion off. It is built in. What you can do is set things up so it has less say. These are the ideas I think are worth trying.

1. Decide before the drop, not during it. Write down what you will do if an investment falls by a certain amount. Decisions made calmly beat decisions made at the bottom of a red day.
2. Write down why you bought. One line is enough. If the reason is still true, a price drop alone is not a reason to sell. If the reason is gone, that is useful to know too.
3. Look less often. Checking on a schedule, rather than whenever your phone is in your hand, can take the edge off.
4. Zoom out. A daily chart is mostly noise. A multi-year chart tells you more about what you actually own.
5. Look at the whole picture. I track my spending monthly, which shows me the full month rather than one scary line. The same idea works for a portfolio: look at everything together, not one position at a time.
6. Ask the flip question. Instead of “how do I avoid losing $100?”, ask “if I did not already own this, would I buy it today?” It strips out the pain and leaves the decision.

Is loss aversion always a bad thing?

Not at all. A bit of loss aversion can be protective. It can stop you putting everything into one risky idea or spending money you cannot spare. In Conscious Spending, I wrote about spending on purpose, and the same applies here. A little caution is healthy.

The problem is when the fear of loss is the only voice in the room. Then it makes decisions for you, and it is usually not very good at maths.

Your situation may differ

Everything above is about how I think about it. It is not advice. How much risk you can handle depends on your age, your income, your savings, your goals and how you sleep at night. Someone with a steady salary and a long runway will feel a dip very differently from someone who has stopped working. There is no single right answer, and your own comfort level matters as much as the numbers.

If you are in Singapore, your CPF and your emergency buffer are part of that picture too. Seeing everything together helps you judge what you can afford to leave alone when markets are noisy.

So what about you?

You can’t switch loss aversion off, but you can decide how much say it gets.

Think of the last time a loss, big or small, stayed in your head longer than a gain of the same size ever did. What was it, and what did you do next? Tell me in the comments. I would love to hear it.