Spencer Li

Loss Aversion Bias – Why a Loss Has Twice the Psychological Impact

trading loss

Loss Aversion Bias in Trading: Why Losing Hurts Twice as Much (and How to Fix It)

Last updated: 3 July 2026 · By Spencer Li, CFTe

Loss aversion bias is the tendency to feel the pain of a loss about twice as strongly as the pleasure of an equal gain, so we go out of our way to avoid losses rather than to chase profits. It was first described by Daniel Kahneman and Amos Tversky in 1979 as part of prospect theory. For traders, it shows up in two costly habits: holding losers far too long, hoping they come back, and cutting winners far too early, scared the profit will evaporate. Both habits do the same damage. They make your losses big and your wins small, which is the exact opposite of what you need to make money. The fix is not willpower. It is a preset stop-loss, decided before you enter, that takes the decision out of your hands when emotion is loudest.

Here is what loss aversion is, how it sabotages real trades, and the one rule that defuses it.

What is loss aversion bias?

Loss aversion bias is a finding from behavioral finance (the study of how psychology drives money decisions) that says the possibility of a loss is, on average, about twice as powerful a motivator as the possibility of a gain of the same size.

Kahneman and Tversky developed it in 1979 as part of the original prospect theory. The short version: people would rather avoid a loss than capture an equal-sized gain. Losing 100 dollars stings more than winning 100 dollars pleases. So we make lopsided choices to dodge the sting, even when those choices cost us money over time.

That asymmetry is normal. It probably kept our ancestors alive. The problem is that markets punish it.

How loss aversion sabotages your trades

In trading, the bias leaks out in two directions, and both of them hurt.

First, it stops you cutting losers. Loss aversion can keep you holding a losing trade long after the reason for the trade is gone, because closing it means admitting the loss is real. Industry veterans have a name for this: “get-even-itis.” You wait and wait for the trade to climb back to your entry, instead of cutting it and moving on to a better one. It is dangerous because the best response to a loss is to take it quickly and free yourself up. The longer you wait, the bigger the hole.

Second, it makes you cut winners too early. The same fear of loss makes you fixate on protecting a profit the moment one appears. As soon as a trade is green, the loss-averse part of your brain panics that the market will reverse and snatch the gain back, so you grab the small profit and run. The problem is that exiting early to protect a gain caps your upside. You never catch the big moves, the ones that actually pay for all the small losses.

Put the two together and you get the trader’s nightmare: small wins, big losses. That math does not survive contact with a real account.

Loss aversion vs disciplined trading, side by side

The loss-averse traderThe disciplined trader
A trade goes against themHolds and hopes (“get-even-itis”), waiting for a reboundExits at the preset stop, no debate
A trade goes in their favourGrabs the small profit early, scared it reversesLets the winner run to a planned target
Where the decision is madeIn the moment, with emotion running hotBefore entry, when the mind is calm
The shape of the resultsBig losses, small winsSmall losses, big wins
State of mind for the next tradeTense, anchored to the last positionNeutral, capital freed up, ready

The left column feels safer in the moment. The right column is what actually compounds.

What is the best solution for loss aversion in trading?

The best solution is a preset stop-loss, the price you decide in advance to exit a losing trade.

If you are disciplined and you set that stop point before you enter, you simply exit when the price is breached. Personally, I think this is the single most underrated tool a new trader has, because of what it removes rather than what it adds. It removes the blind hope of a rebound. There is no “maybe one more day.” The decision was already made when you were calm, not now when you are scared.

It does two more useful things. By squaring off the position, it resets you to a neutral frame of mind for the next trade, instead of staying emotionally hooked to the loser. And it frees up the capital that was trapped in a dead trade, so you can put it into a better one.

Do note that the stop only works if you respect it. A stop-loss you keep moving lower “just this once” is not a stop-loss. It is a wish.

As Ralph Waldo Emerson put it: “Win as though you were used to it, lose as if you enjoyed it for a change.”

Where the human edge comes in

Any platform can place a stop-loss order for you in one click. That part is free. What no tool can do is make you honour it when the trade is 2 percent underwater and every instinct is screaming that it will bounce back. The bias is human, so the discipline has to be human too. A system can hold the line; only you can decide not to override it. That is the second of the Five Edges, discipline and sizing, and it is the one loss aversion attacks hardest.

FAQ

What is loss aversion bias in simple terms?
It is the tendency to feel a loss about twice as strongly as an equal gain, so we work harder to avoid losses than to capture profits. Kahneman and Tversky described it in 1979 as part of prospect theory.

How does loss aversion affect traders?
It makes traders hold losing trades too long, hoping for a rebound (“get-even-itis”), and close winning trades too early to protect the profit. The result is big losses and small wins.

What is “get-even-itis”?
It is an industry nickname for waiting too long for a losing trade to climb back to your entry price, instead of cutting the loss and moving on. It is a direct symptom of loss aversion.

How do I overcome loss aversion in trading?
Set a stop-loss before you enter the trade and exit when it is hit, with no exceptions. Deciding in advance, while you are calm, removes the in-the-moment emotion that drives the bias.

Is loss aversion the same as risk aversion?
No. Risk aversion is a general preference for certainty. Loss aversion is the specific finding that losses hurt roughly twice as much as equal gains feel good, which is why it leads to such lopsided trading decisions.

Loss aversion is wired into all of us. You will not delete it. The goal is to build a routine that makes the bias irrelevant, by deciding your exits before the emotion arrives.

For the full picture of how psychology drives your results, read the pillar: The Complete Guide to Investing and Trading Psychology.

Want a routine that takes the emotion out of it? Grab the free 15-Minute Swing Trading Starter Kit. It is the exact once-a-day process I use to scan, set my stops in advance, and trade any market in 15 minutes.

About the author. Spencer Li is the founder of Synapse Trading and a Certified Financial Technician (CFTe) with 15 years of trading across stocks, forex, crypto, commodities, and bonds. His trade log is public, 404 trades, losses left in. He teaches low-risk swing trading in 15 minutes a day, one system for any market.

Education, not financial advice. Synapse Trading is not licensed by MAS to advise on investment products. Trading carries risk of loss; past performance is not indicative of future results.

Related

The Complete Guide to Investing and Trading Psychology (pillar) · How to use a stop-loss · Cut your losses and let your profits run · Common cognitive biases in trading

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Spencer Li

Private Trading Workshop | Guest Speaker at STATS (Singapore Technical Analysts & Traders Society)

Today, we were invited to give an exclusive seminar to the members of STATS (Singapore Technical Analysts & Traders Society), where we shared our prototype of the Trader Blueprint. With a focus on price action and psychology, we shared how to nurture a new trader into a professional via our blueprint for success.

This included 7 important attributes starting with the letter “M”, which are all required to become an excellent trader.

  1. Masterplan
  2. Market
  3. Method
  4. Money
  5. Mindset
  6. Mastery
  7. Mentoring

Guest Speaker at STATS

Many people spend their whole lives searching for the holy grail of trading, but fail to realise that the method is merely one of the 7 M’s. That is why we created an all-rounded program to focus not just on a proven methodology, but also include the other aspects of trading.

Stay tuned for our upcoming seminars!

Sign up for our mailing list to keep updated of the latest workshops and seminars!
For program enquiries, please email info@synapsetrading.com

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Spencer Li

Confirmation Bias – I See Only What I Want to See!

What Is Confirmation Bias in Trading (and How to Beat It)?

Last updated: 2026-06-14 · By Spencer Li, CFTe

Confirmation bias is the tendency to notice and trust information that supports what you already believe, while ignoring or explaining away anything that contradicts it. In trading, it is dangerous because a trader who has already decided “this is going up” will hunt for the indicators, news, and chart reads that agree, and quietly skip the ones that do not. The fix is not a smarter indicator. It is a habit of forced objectivity: record every signal a method gives you, the losses as well as the wins, and judge the method on the full record instead of the flattering half. If you only remember the trades that proved you right, you are not testing your edge. You are decorating your opinion.

Here is where the bias comes from, the three places it bites traders, and the one record-keeping habit that beats it.

What is confirmation bias?

Confirmation bias is a form of selective perception (your mind quietly filtering what you take in). It emphasises ideas that confirm your beliefs and devalues whatever contradicts them. You can think of it as a selection bias in how you collect evidence: you go looking for the proof that fits, and that is mostly what you find.

A simple everyday example. Say you believe more red cars drive past your house in summer than at any other time of year. That belief might be true. But it might just be confirmation bias: in summer you notice the red cars and overlook them the rest of the year, and over time that one-sided noticing hardens into a “fact” you would defend. You never actually counted.

Put another way, confirmation bias is our all-too-natural ability to convince ourselves of whatever we want to believe. We attach undue weight to events that corroborate the outcome we were hoping for, and we play down whatever contrary evidence shows up.

Why is confirmation bias dangerous for traders?

Because trading rewards being right and punishes being stubborn, and confirmation bias makes you feel right while you are being stubborn. A trader who is entrenched in an opinion will actively seek out the information that confirms it and ignore the information that does not. The feeling of conviction goes up. The quality of the decision goes down. Here are the three places it does the most damage.

Where it bitesWhat it looks likeThe fix
Indicator cherry-pickingYou stack indicators until enough of them “agree” with the trade you already want, and you discount the ones flashing the opposite signalDecide your indicators and rules before the trade, then read all of them, including the ones you do not like
Gurus and marketing gimmicksA “sure-win” guru looks like a genius because you celebrate his hits and forget his misses (and so does he)Demand the full track record, every call, scored. No full log, no credibility
Your own resultsYou remember the trades that proved you right and let the losers fade, so a mediocre method feels like a great oneLog every signal the method gives, win or lose, and grade it on the whole set

The indicator trap

This bias is especially nasty for traders who lean heavily on indicators, because many indicators give conflicting signals at the same time. If you have already chosen a direction, it is not hard to find the two or three indicators that support it and treat the rest as noise. You are not analysing the market anymore. You are assembling a defence for a verdict you already reached.

The guru trap

The second hazard is marketing gimmicks and market gurus, the ones who make a lot of (often absurd) forecasts based on a “sure-win” method. To a newer trader they can look like they have a very high hit rate. Mostly that is because people want to believe the guru, so they celebrate his correct predictions and conveniently ignore the less-accurate or completely-off ones. The guru rarely keeps the receipts, and neither does the audience. Same bias, pointed outward.

What is the best solution for confirmation bias in trading?

Objectivity. You have to be willing to see both sides of the coin instead of only the side you like.

The most practical version of that is simple to say and hard to do: if you want to test whether a method works, record every single signal it produces, the gains and the losses, and not just the instances where it worked. The losers are not an embarrassment to hide. They are half the data. A method judged only on its winners is not a tested method. It is a story.

This is exactly why my own trade log is public, all of it, losses left in. Not because the losing trades are flattering, but because a record that quietly drops them tells you nothing true about the edge.

As Francis Bacon put it four hundred years ago:

“It is the peculiar and perpetual error of the human understanding to be more moved and excited by affirmatives than by negatives.”

That is confirmation bias, named long before anyone called it that.

Where the human edge comes in

An indicator, or an AI scanner, will happily generate signals all day. It has no opinion to defend, but it also will not stop you from defending yours. The thing software cannot do for you is force the awkward question: “What would prove me wrong right now, and have I actually looked for it?” Catching your own bias, scoring your method honestly, and sitting with a losing record instead of deleting it is psychology and accountability work. That is two of the Five Edges no tool will trade for you.

FAQ

What is confirmation bias in simple terms?
Confirmation bias is the habit of paying attention to evidence that agrees with what you already believe and ignoring evidence that does not. Over time, one-sided noticing turns a hunch into a “fact” you never actually tested.

How does confirmation bias affect traders?
It makes traders seek out indicators, news, and chart reads that support a position they have already decided on, while discounting the warning signs. It also makes “sure-win” gurus look more accurate than they are, because their hits get remembered and their misses get forgotten.

How do I overcome confirmation bias in trading?
Record every signal your method produces, wins and losses, and judge the method on the full record. Define your rules before the trade, read every indicator (not just the agreeable ones), and treat any guru with no complete, scored track record as unproven.

Is confirmation bias the same as a self-fulfilling prophecy?
No. A self-fulfilling prophecy is when believing something helps make it happen. Confirmation bias is when you only notice the evidence that says it already happened, whether or not it did.

Why should I keep a trading journal that includes my losses?
Because a journal that quietly drops the losers tells you nothing honest about your edge. The losing trades are half the data. Logging every signal, win or lose, is the single most effective defence against fooling yourself.

So, the next time a trade feels obviously right, ask yourself one question: am I reading the market, or am I collecting proof for a verdict I already reached? That small pause is most of the skill.

For the full picture on how the mind works against traders, read the pillar: The Complete Guide to Trading and Investing Psychology.

Want the system that keeps the bias out of the trade? Grab the free 15-Minute Swing Trading Starter Kit. It’s the exact routine I use to scan once a day and trade any market in 15 minutes, rules first, opinion second.

About the author. Spencer Li is the founder of Synapse Trading and a Certified Financial Technician (CFTe) with 15 years of trading across stocks, forex, crypto, commodities, and bonds. His trade log is public, 404 trades, losses left in. He teaches low-risk swing trading in 15 minutes a day, one system for any market.

Education, not financial advice. Synapse Trading is not licensed by MAS to advise on investment products. Trading carries risk of loss; past performance is not indicative of future results.

Related

The Complete Guide to Trading and Investing Psychology (pillar) · Loss aversion and how it hurts traders · Why keeping a trading journal matters · Recency bias in trading

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Spencer Li

Endowment Bias – Do You Really “Own” a Trading Position?

Endowment Bias in Trading: Why You Hold Losing Positions Too Long

Last updated: 3 July 2026 · By Spencer Li, CFTe

Endowment bias (a behavioral-finance term for valuing something more simply because you own it) is what makes traders hold losing positions far longer than they should. Standard economics says the price you would pay to buy an asset should equal the price you would accept to sell it. In real life the two are not equal. Once you own a position, you anchor to it, you feel the loss of giving it up more sharply than the gain of holding something better, and so you sit on the loser instead of rotating into a stronger trade. The fix is a single question you ask yourself out loud: “If I held no position right now, would I open this exact trade today?” If the answer is no, you are not holding the trade because it is good. You are holding it because it is yours. That is the bias talking, and it is costing you the better trade you could be in instead.

Here is where the bias comes from, how it shows up at the screen, and the one habit that breaks it.

What is endowment bias?

Endowment bias is the tendency to put a higher value on an object once you own it than you would if you did not own it yet.

The cleanest way to see it: imagine two versions of you. One owns a position and is deciding whether to keep it. The other owns nothing and is deciding whether to buy that same position fresh. Standard economic theory says both versions should value it identically. Your willingness to pay for it (as the buyer) should equal your willingness to accept for it (as the seller). In practice the owner demands more to let it go than the non-owner would pay to get it. Same asset, two different prices, and the only thing that changed is who is holding it.

The mechanism underneath is loss aversion. Giving up something already in your “endowment” (your set of holdings) registers as a loss, and losses hurt more than equivalent gains feel good. So the position gets a premium in your head that has nothing to do with its actual prospects.

How endowment bias shows up in trading

This is the bias that keeps you married to a losing position.

You bought the stock. It dropped. There is a better setup right in front of you, with higher expected upside. The rational move is to close the loser and rotate into the better trade. But you do not, because the position feels like yours. Selling it means crystallising the loss and admitting the entry was wrong, and that registers as giving something up. So you freeze.

That freeze has a name: decision paralysis. You place an irrational premium on the price you would need to be paid to let the position go, and that premium is high enough that you just hold. The market does not care that the position is yours. It will keep moving with or without your attachment to it.

Here is the same idea in a table, which is the fastest way to catch yourself doing it:

The owner (you, holding it)The fresh buyer (you, with no position)
What you feel“This is mine. Selling means I lose.”“Is this the best place for my capital right now?”
Reference pointYour entry priceThe current setup on its own merits
What you weighThe pain of crystallising the lossThe upside versus other available trades
Likely actionHold the loser, hope it comes backBuy only if it is genuinely the best option
Whose decision is cleanerDistorted by ownershipDistorted by nothing

The fresh buyer is making the better decision every time. The trick is to force yourself into the fresh buyer’s seat while you are actually the owner.

What is the best way to break free from endowment bias?

Ask yourself one question: “If I did not have any positions at the moment, would I still choose to take the position I am currently holding?”

If you answered no, then you are holding for the wrong reason, and you owe yourself an honest look at why you are still in it.

That question works because it strips out the ownership. It puts you back in the fresh buyer’s seat. You are no longer defending a past entry or protecting your ego from a realised loss. You are just asking whether this is the best home for your money today, which is the only question that should ever decide whether you stay in a trade.

Personally, I run this check on every open position during my once-a-day review. It takes seconds, and it has talked me out of more “let me just give it a bit longer” holds than any indicator ever has.

As Jonathan Swift put it:

“A wise man should have money in his head, but not his heart.”

That is the whole lesson in one line. The moment a position lives in your heart instead of your head, endowment bias has you.

Where the human edge comes in

A screener can rank every setup in the market for you in a second, and tell you the loser you are holding is no longer the best use of your capital. What it cannot do is make you act on that, close a trade you have grown attached to, and admit the entry was wrong without flinching. The data is now free. The discipline to override your own ownership instinct is not, and it is one of the edges no algorithm trades for you. The screen will show you the better trade; only you can let go of the worse one.

FAQ

What is endowment bias in simple terms?
Endowment bias is valuing something more just because you own it. The classic test: people demand a higher price to sell an object than they would have paid to buy the same object minutes earlier.

Why does endowment bias make traders hold losing positions?
Because closing the loser feels like giving something up, and giving something up registers as a loss. Loss aversion makes that pain outweigh the larger gain available from rotating into a better trade, so traders freeze and hold.

What is the difference between endowment bias and loss aversion?
Loss aversion is the broader principle that losses hurt more than equivalent gains feel good. Endowment bias is one specific result of it: once you own something, parting with it feels like a loss, so you overvalue it.

How do I overcome endowment bias when trading?
Ask yourself whether you would open the exact position today if you held nothing. If the answer is no, the only reason you are still in it is that you own it, which is not a reason to hold.

Is endowment bias the same as the sunk cost fallacy?
They are close cousins and often show up together. Endowment bias is about overvaluing what you own; the sunk cost fallacy is about staying in because of what you have already spent or lost. Both keep you in trades you should have left.

So next time you are sitting on a position that has gone the wrong way, run the test before you do anything else: no positions, fresh start, would you buy it today? Let me know in the comments how often your answer surprises you.

If you want the rest of the mental traps that quietly drain trading accounts, read the pillar: The Complete Guide to Investing and Trading Psychology.

Want the routine that keeps the emotion out of it? Grab the free 15-Minute Swing Trading Starter Kit. It is the exact once-a-day process I use to review every open position and trade any market in 15 minutes.

About the author. Spencer Li is the founder of Synapse Trading and a Certified Financial Technician (CFTe) with 15 years of trading across stocks, forex, crypto, commodities, and bonds. His trade log is public, 404 trades, losses left in. He teaches low-risk swing trading in 15 minutes a day, one system for any market.

Education, not financial advice. Synapse Trading is not licensed by MAS to advise on investment products. Trading carries risk of loss; past performance is not indicative of future results.

Related

Complete Guide to Investing and Trading Psychology (pillar) · Loss aversion in trading · The sunk cost fallacy for traders · How to cut losing trades

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Spencer Li

Long-term refinancing operations (LTROs) – Long-term time bombs?

Long-term refinancing operations (LTROs) involve the central bank lending money at a very low interest rates to eurozone banks, which has led to the term “free money.”

The injection of this cheap money means that banks can use it to buy higher-yielding assets and make profits, or to lend more money to businesses and consumers – which could help the real economy return to growth as well as potentially yielding returns.

Banks can use assets such as sovereign bonds as collateral for the loans – although they can no longer use Greece’s bonds as collateral after the country was downgraded to a default rating by Standard & Poor’s. This has helped to boost some of the more troubled sovereign bonds, in peripheral countries such as Spain and Italy, as their yields have fallen because they are being used as collateral for the operations.

This can help out the entire country. Spanish and Italian banks, the biggest buyers in the last operation, used their holdings of their own sovereign bonds as collateral for the LTROs. This helped reduce sovereign bond yields, which were threatening to stay at unsustainable levels that would make debt repayments impossible.

In previous auctions, the money usually had to be paid back within three months, six months or 1 year. The ECB’s launch of three-year LTROs in December meant that this time scale was extended, which helped cause a much greater takeup than usual.

– references: CNBC


The question is, what happens after 3 years?

Unless the Euro zone countries can miraculously turn their economies around in 3 years, the problem has just been delayed by 3 years. If the banks choose not to loan out the cash, they can simply use the money to increase their returns via investments, which does not benefit the economy at all. Also, where does the ECB get this cash from? It will need to pay back the cash one day, or risk the devaluation of the Euro, similar to what the US is facing now. The collateral used are the sovereign bonds (which no one wants to buy in the first place), and should the countries decide to default, the ECB will be left with a lot of useless junk on their hands.

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