Loss aversion
Why does a falling market feel far worse than an equal rise feels good, and how does that distort decisions?
In plain words
Loss aversion is the tendency to feel the pain of a decline more strongly than the pleasure of an equal gain. A fall of a given size stings roughly twice as much as a rise of the same size delights, which shapes how people react to price moves.
Why it matters
Traders feeling losses more acutely may close positions too early during normal volatility or hold too long hoping to break even. It also makes a market that has already fallen look more frightening than the same move on the way up, distorting risk assessment independent of fundamentals.
In a real week: BTC, week of 26 March 2018
In the week of 26 March 2018, BTC fell 19.56%, from 8470.14 to 6813.01. Its worst day lost 10.81% while its best day gained just 1.97%. By 1 April it sat 41.89% below its 52-week high, closing in the lower third of the week's range. An equivalent 19.56% gain would have drawn far less attention than this loss commanded.
A common mistake
Assuming a big fall automatically signals a good buying opportunity simply because losses feel worse. Loss aversion describes the emotional response, not the market's future direction.