A $10,000 loss and a $10,000 gain are mathematically equivalent. They are not psychologically equivalent. The loss feels worse. Much worse.
This asymmetry is called loss aversion, and it is one of the most robust findings in behavioural economics. It explains why investors make decisions during market downturns that they would never make during calm periods. It explains why the urge to sell during a crash can feel overwhelming, even when the rational case for staying invested is clear.
This article explains how loss aversion works, why it leads to panic selling, and what evidence-based strategies can help counteract it.
This is general educational information, not personal financial advice.
What Loss Aversion Is#
Loss aversion is the tendency for losses to feel approximately twice as painful as equivalent gains feel good.¹ Losing $100 produces more psychological discomfort than gaining $100 produces pleasure.
This was first documented by Daniel Kahneman and Amos Tversky in their foundational work on Prospect Theory.¹ Their research showed that people do not evaluate outcomes in absolute terms. They evaluate them relative to a reference point, usually their current position or recent expectations. Gains feel good. Losses feel bad. But the bad feeling is disproportionately strong.
Loss aversion is not a character flaw or a sign of irrationality. It appears to be a deep feature of human psychology, likely with evolutionary origins. For most of human history, a loss (of food, shelter, or safety) was more dangerous than an equivalent gain was beneficial. Avoiding losses was often the difference between survival and death.
In modern investing, this wiring creates problems. The stock market is not trying to kill you. A 20% decline in a portfolio is uncomfortable, but it is not an immediate threat to survival. Yet the emotional response can be intense, because the brain processes financial losses through the same systems that once processed life-threatening risks.
How Loss Aversion Leads to Panic Selling#
When markets fall, loss aversion triggers a cascade of emotional responses:
The pain of watching losses accumulate becomes unbearable. Every statement, every app notification, every glance at the portfolio reinforces the feeling that something is deeply wrong. The brain interprets this as danger.
The urge to "do something" intensifies. Inaction feels wrong when danger signals are firing. Selling provides immediate relief. The losses stop growing. The anxiety decreases. The brain interprets this as safety.
Rationalisation follows action. After selling, the investor finds reasons to justify the decision. "The market is clearly broken." "I'll buy back in when things stabilise." "I should have sold earlier." These narratives feel compelling because they reduce cognitive dissonance.
The problem is that selling during a decline locks in losses. The money that was lost on paper becomes real. And the recovery, when it comes, happens without the investor who sold.
Research shows that the best and worst days in markets tend to cluster together.² Investors who sell during a crash often miss the sharp rebounds that follow. Missing just a few of the best days can dramatically reduce long-term returns.
Myopic Loss Aversion: The Frequency Problem#
Loss aversion is amplified by how often you look at your investments.
The more frequently you check your portfolio, the more often you experience the pain of short-term losses. Over any given day, the probability of seeing a loss is close to 50%. Over a year, the probability of seeing a loss is lower. Over a decade, it is lower still.
This phenomenon is called myopic loss aversion.³ "Myopic" refers to short-sightedness. When investors focus on short-term fluctuations, they experience more pain than if they focused on long-term trends. The underlying investment might be performing well over years, but if checked daily, it will produce many more "loss" experiences than "gain" experiences.
The implication is counterintuitive: checking less often can improve outcomes. Not because it changes the investment, but because it changes the emotional experience, which in turn affects behaviour.
Who Is Most Vulnerable#
Research on panic selling during market downturns has identified patterns in who is most likely to sell:
- Investors with high present bias (those who heavily discount future outcomes relative to immediate ones) are more likely to panic sell.⁴ The immediate relief of selling outweighs the distant cost of missing the recovery.
- Less financially literate investors are more likely to sell, partly because they may not understand that declines are normal and recoveries are common.⁴
- Overconfident investors are also vulnerable, despite appearing to be the opposite. Overconfidence leads to excessive trading and an inflated belief in one's ability to time the market. When that timing fails, panic can follow.
- Investors who check frequently experience more loss events and more emotional volatility, increasing the probability of a reactive decision.
These patterns suggest that vulnerability to panic selling is not fixed. It can be influenced by education, behaviour design, and deliberate countermeasures.
Evidence-Based Countermeasures#
Behavioural economics does not just describe problems. It also points toward solutions. The following strategies have research support for reducing the influence of loss aversion and the likelihood of panic selling.
1. Pre-Commitment#
Pre-commitment means making decisions in advance, before the emotional pressure of a downturn distorts judgment.
Examples include:
- Writing down rules for what you will do if markets fall 20%, 30%, or 40%. The act of writing creates a reference point that can anchor future behaviour.
- Committing to a rebalancing schedule (quarterly, annually) rather than reacting to market movements.
- Using automatic contribution plans that continue regardless of market conditions.
Research on pre-commitment in other domains (gambling, savings) shows that restricting future choices in advance reduces impulsive, emotionally driven decisions.⁵
The key is that the commitment must be made when calm. During a market crash, the emotional brain is in control. Rules written before the crash provide a counterweight.
2. Automation#
Automation removes the decision from the moment of stress.
When contributions are automatic, they continue during downturns without requiring the investor to actively choose to invest when prices are falling. This is psychologically difficult to do manually (it feels like throwing money into a fire), but automatic systems bypass the emotional resistance.
Similarly, automatic rebalancing ensures that portfolios stay aligned with long-term targets without requiring active decisions during volatile periods.
Automation is not about removing all control. It is about designing systems that do the right thing by default, so that panic has fewer levers to pull.
3. Reduced Checking Frequency#
If checking more often increases the experience of loss, checking less often reduces it.
This is not denial. It is deliberate information management. The long-term investor does not need daily price updates. The information is noise, and the emotional cost is real.
Practical approaches include:
- Setting a schedule for portfolio reviews (monthly, quarterly) and sticking to it.
- Removing investment apps from the home screen of your phone.
- Turning off price alert notifications.
- Avoiding financial news during periods of high volatility.
These changes do not affect the underlying investment. They affect the experience of investing, which affects behaviour.
4. Written Rules#
Written rules serve as a behavioural anchor. When the urge to sell becomes intense, the written rule provides a reference point that was created by a calmer, more rational version of yourself.
Examples of written rules:
- "I will not sell any holding within 12 months of purchase."
- "I will not check my portfolio more than once per month."
- "If markets fall more than 20%, I will re-read this document before making any decision."
- "I will continue my regular contributions regardless of what markets are doing."
The power of written rules is not that they are unbreakable. It is that they create friction. They slow down the reactive process and provide an opportunity for the rational brain to catch up.
5. Framing and Perspective#
How losses are framed affects how they feel.
Seeing a portfolio decline as a "loss" triggers loss aversion. Seeing the same decline as "buying shares at a lower price" or "a normal part of the journey" can reduce the emotional intensity.
This is not self-deception. Markets do recover. Declines are normal. Framing the experience accurately (rather than catastrophically) is more helpful than framing it in a way that triggers panic.
Practical framing strategies include:
- Viewing long-term charts rather than short-term ones. A 20% decline looks different on a 30-year chart than on a 6-month chart.
- Reminding yourself of past recoveries. The 2008 crash, the 2020 crash, and every other significant decline has eventually been followed by recovery.
- Focusing on contributions rather than returns. During downturns, the focus can shift from "how much have I lost" to "how much am I adding at these lower prices."
The Limits of Countermeasures#
These strategies reduce the influence of loss aversion. They do not eliminate it.
Loss aversion is a deep psychological phenomenon. It cannot be reasoned away or suppressed through willpower. The goal is not to stop feeling the discomfort of losses. The goal is to create systems and structures that make it harder to act on that discomfort in ways that cause lasting harm.
Even with all the countermeasures in place, some investors will still panic sell during severe downturns. The strategies improve the odds, not guarantee the outcome.
This is why realistic expectations matter. Knowing that you might feel intense pressure to sell, and that this pressure is normal, can itself be a form of preparation. The investor who expects discomfort is less surprised by it than the investor who believed they would be immune.
Summary#
Loss aversion is the tendency for losses to feel approximately twice as painful as equivalent gains feel good. This asymmetry is a deep feature of human psychology, likely with evolutionary origins. During market downturns, loss aversion triggers panic selling: the immediate relief of stopping the pain outweighs the distant cost of missing the recovery. Myopic loss aversion amplifies the problem: the more frequently you check your portfolio, the more often you experience loss, regardless of long-term performance. Evidence-based countermeasures include pre-commitment (making decisions in advance), automation (removing the decision from the moment of stress), reduced checking frequency (limiting exposure to short-term noise), written rules (creating friction and anchors), and reframing (viewing declines as normal rather than catastrophic). These strategies reduce the influence of loss aversion but do not eliminate it. The goal is to build systems that make harmful reactions harder, not to suppress the emotional response itself.
Sources#
- Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291. https://doi.org/10.2307/1914185
- J.P. Morgan Asset Management. (2024). Guide to the markets. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
- Benartzi, S., & Thaler, R. H. (1995). Myopic loss aversion and the equity premium puzzle. The Quarterly Journal of Economics, 110(1), 73-92. https://doi.org/10.2307/2118511
- Yoshinaga, C. E., & Suzuki, T. (2024). Behavioral biases and panic selling during COVID-19. Behavioral Sciences, 14(9), 795. https://doi.org/10.3390/bs14090795
- Cowie, M., & McCreadie, D. (2017). Precommitment and gambling risk. PubMed. https://pubmed.ncbi.nlm.nih.gov/28092193/