Which psychological bias might affect an investor’s decision to hold onto a losing stock?

Loss aversion is a psychological bias that illustrates how individuals tend to prefer avoiding losses over acquiring equivalent gains. This principle is a key component of prospect theory, which suggests that losses weigh more heavily in a person’s decision-making process than gains of the same size. In the context of investing, when an investor holds onto a losing stock, it can be largely attributed to loss aversion.

Investors may feel a strong emotional response to the idea of realizing a loss; selling a losing stock would mean accepting that they lost money, which can be psychologically difficult. Instead, they might hold onto the stock with the hope that it will rebound, driven by the desire to avoid the pain of realizing the loss. This behavior can lead to holding onto poor investments longer than is rational, as the emotional discomfort associated with loss overshadows a more objective assessment of the investment’s potential.

Other choices like the recency effect, herd behavior, and availability heuristic do influence investment decisions but in different ways. The recency effect involves placing greater weight on recent experiences when making decisions, herd behavior refers to following the actions of a larger group, and the availability heuristic is about relying on immediate examples that come to mind. While these biases affect investor behavior, they do not