Question

The behavioral tendency known as loss aversion causes some investors​ to:

A. overestimate risk.
B. avoid frequent trading.
C. sell losing stocks too quickly and keep winning stocks too long.
D. hold losing stocks longer than winning stocks.

Answer 1

Loss aversion is a behavioral tendency that causes some investors to sell losing stocks too quickly and hold winning stocks for too long.

Step-by-step explanation:

Loss aversion is a behavioral tendency that causes some investors to sell losing stocks too quickly and hold winning stocks for too long.

This behavior is due to the fact that people tend to focus more on losses than gains, as demonstrated by research conducted by economists Daniel Kahneman and Amos Tversky. They found that a $1 loss is felt 2.25 times more intensely than a $1 gain.

This has implications for investing, as it can lead to suboptimal decision-making and result in investors reacting more strongly to losses, leading to potential overplaying of the stock market.