{"id":4467,"date":"2025-03-29T04:43:04","date_gmt":"2025-03-28T23:13:04","guid":{"rendered":"https:\/\/www.torusdigital.com\/toruscope\/?p=4467"},"modified":"2025-08-08T19:19:46","modified_gmt":"2025-08-08T13:49:46","slug":"why-loss-aversion-causes-bad-investment-decision","status":"publish","type":"post","link":"https:\/\/www.torusdigital.com\/toruscope\/investment-guide\/why-loss-aversion-causes-bad-investment-decision\/","title":{"rendered":"Why Loss Aversion Causes Bad Investment Decisions &#038; How to Avoid It?"},"content":{"rendered":"<div class=\"wpb-content-wrapper\"><p>[vc_section el_id=&#8221;blog-inner-layout&#8221;][vc_row overlay_dotted=&#8221;&#8221;][vc_column el_class=&#8221;blog_primary&#8221;][vc_row_inner][vc_column_inner][vc_column_text css=&#8221;&#8221;]<span style=\"font-weight: 400;\">Investing involves both psychology and numbers. Market trends, valuations, and economic indicators are important, but human emotions influence how investors respond to financial risks. Loss aversion is a key bias that affects investment decisions. It can cause irrational choices, leading to missed opportunities or unnecessary losses.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This article will discuss <\/span><b>loss aversion in investing<\/b><span style=\"font-weight: 400;\">, its impact on financial decisions, and strategies to overcome this bias.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Understanding_Loss_Aversion_in_Investing\"><\/span><span style=\"font-weight: 400;\">Understanding<\/span><b> Loss Aversion in Investing<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Loss aversion is a bias where losing feels twice as bad as gaining feels good. This concept was popularised by psychologists, Daniel Kahneman and Tversky. The <\/span><b>psychology of investing<\/b><span style=\"font-weight: 400;\"> is a key principle that explains why investors react emotionally to financial losses. For example, losing 100 affects investors way more than gaining 100 at the same time. This can cause investors to hold onto losing investments too long or sell winning investments too soon, affecting portfolio performance.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Real-World_Examples_of_Loss_Aversion_in_Action\"><\/span><span style=\"font-weight: 400;\">Real-World Examples of Loss Aversion in Action<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Loss aversion&#8217;s impact can be illustrated by examining these two real-world scenarios:<\/span><\/p>\n<ul>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"The_Dot_Com_Bubble\"><\/span><span style=\"font-weight: 400;\">The Dot Com Bubble<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">In the late 1990s, investors invested heavily in tech stocks due to FOMO. When the bubble burst in 2000, they held onto their falling stocks, hoping for a recovery, but their portfolios continued to decline.<\/span><\/p>\n<ul>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"The_2008_Financial_Crisis\"><\/span><span style=\"font-weight: 400;\">The 2008 Financial Crisis\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">During the 2008 crisis, many investors panicked and sold their holdings at low prices. Those who held onto their investments faced significant losses due to fear of losing more. On the other hand, investors who remained calm and focused on the long term were able to recover their losses and even achieve growth.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_Loss_Aversion_Leads_to_Bad_Investment_Decisions\"><\/span><span style=\"font-weight: 400;\">How Loss Aversion Leads to Bad Investment Decisions?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Loss aversion, a concept from behavioural finance, makes investors fear losses more than they enjoy gains. This bias affects investors in various ways, leading to suboptimal decisions like:<\/span><\/p>\n<ul>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"Holding_onto_Losing_Investments_Too_Long_The_Disposition_Effect\"><\/span><span style=\"font-weight: 400;\">Holding onto Losing Investments Too Long (The Disposition Effect)<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Investors tend to keep assets that are not performing well to avoid losing funds, in the hope that the assets will improve in the future. This behaviour is called the disposition effect, discovered by Hersh Shefrin and Meir Statman in 1985. It is one of the <\/span><b>common investor biases<\/b><span style=\"font-weight: 400;\"> that causes individuals to make emotional rather than rational financial choices. They observed that people tend to sell assets that have gained value and hold onto those that have lost value because they want to avoid the regret of making a loss.<\/span><\/p>\n<ul>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"Selling_Winners_Too_Early\"><\/span><span style=\"font-weight: 400;\">Selling Winners Too Early<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Investors may sell profitable investments early to secure gains due to the fear of losing them. This can limit long-term returns. The disposition effect plays a role in this behaviour, as investors prefer the satisfaction of gains over the regret of future losses.<\/span><\/p>\n<ul>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"Overreacting_to_Market_Volatility\"><\/span><span style=\"font-weight: 400;\">Overreacting to Market Volatility\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Loss-averse investors tend to panic in market downturns. They sell investments to avoid more losses, even if the downturn is temporary. This results in selling at low points and missing recoveries. A good example is the 2008 financial crisis, where panic selling heavily affected market stability.\u00a0<\/span><\/p>\n<ul>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"Avoiding_Risky_But_Profitable_Investments\"><\/span><span style=\"font-weight: 400;\">Avoiding Risky But Profitable Investments\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Investors avoid high short-term risks due to fear of losses, missing out on potential long-term gains. This cautious strategy may result in lower returns as they overlook opportunities that could yield substantial profits in the long run despite short-term ups and downs.<\/span><\/p>\n<ul>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"Not_Diversifying_Investments\"><\/span><span style=\"font-weight: 400;\">Not Diversifying Investments\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Loss aversion may lead investors to avoid diversifying their assets and stick to what they know, fearing the risks of unfamiliar investments. This limited diversification can make them more vulnerable to downturns in specific sectors and limit potential gains from other asset classes. For example, focusing only on domestic stocks can cause an investor to miss out on international growth opportunities, which could impact their portfolio&#8217;s performance.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Overcome_Loss_Aversion_in_Investing\"><\/span><span style=\"font-weight: 400;\">How to Overcome Loss Aversion in Investing?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">You need awareness, discipline, and a strategic approach to overcome loss aversion. Here are some practical ways to counter this bias:<\/span><\/p>\n<ul>\n<li><b>Focus on Long-term Investing: <\/b><span style=\"font-weight: 400;\">To combat loss aversion, focus on long-term goals instead of short-term market changes. By looking ahead, you can minimise the emotional impact of temporary losses and prevent impulsive decisions.<\/span><\/li>\n<li aria-level=\"1\"><b>Diversify Your Portfolio: <\/b><span style=\"font-weight: 400;\">Diversification is important for investing. It involves spreading investments across various assets to reduce the impact of losses. This strategy minimises risk and helps stay calm during market fluctuations.<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Set Clear Investment Rules:<\/b><span style=\"font-weight: 400;\"> Predefined rules for buying and selling investments can prevent emotional decisions. For instance, you can sell an investment if it decreases by a specific percentage or rebalance your portfolio regularly. Following these rules can help you avoid letting loss aversion influence your decisions.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li aria-level=\"1\"><b>Focus on the Big Picture: <\/b><span style=\"font-weight: 400;\">Focus on your portfolio&#8217;s overall performance rather than individual gains and losses. One losing investment doesn&#8217;t determine your financial future. By looking at the big picture, you can make rational decisions that match your long-term goals.<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Educate Yourself About Behavioural Finance: <\/b><span style=\"font-weight: 400;\">By understanding investing psychology and <\/span><b>behavioural financial mistakes,<\/b><span style=\"font-weight: 400;\"> you can identify when loss aversion affects your decisions. Being aware of these tendencies helps you overcome them effectively.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li aria-level=\"1\"><b>Work With Financial Advisor: <\/b><span style=\"font-weight: 400;\">A financial advisor offers an objective view and helps you stay disciplined in tough times. They can create a custom investment plan based on your risk tolerance and goals.<\/span><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Wrapping_Up\"><\/span><span style=\"font-weight: 400;\">Wrapping Up\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Loss aversion is a common bias among investors. It can lead to irrational decisions. To avoid this bias, investors should understand it and use practical strategies. These strategies help avoid emotional pitfalls, reduce risk, and maximise returns. The key is to have a long-term perspective, diversify wisely, use systematic investment approaches, and stay disciplined. By adopting the right mindset, investors can overcome loss aversion and make smarter, more profitable investment decisions.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Make smarter investment decisions with expert guidance. 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https%3A%2F%2Fwww.torusdigital.com%2Ftoruscope%2Finvestment-guide%2Fwhy-loss-aversion-causes-bad-investment-decision%2F\" class=\"whatsapp\" data-toggle=\"tooltip\" data-placement=\"top\" title=\"Share On WhatsApp\" target=\"_blank\"><i class=\"fa fa-whatsapp\"><\/i><\/a>\n        <a href=\"\/\/www.linkedin.com\/shareArticle?mini=true&url=https%3A%2F%2Fwww.torusdigital.com%2Ftoruscope%2Finvestment-guide%2Fwhy-loss-aversion-causes-bad-investment-decision%2F&title=Why+Loss+Aversion+Causes+Bad+Investment+Decisions+%26%23038%3B+How+to+Avoid+It%3F\" class=\"linkedin\" data-toggle=\"tooltip\" data-placement=\"top\" title=\"Share On Linkedin\" target=\"_blank\"><i class=\"fa fa-linkedin\"><\/i><\/a>\n    <\/div>[\/vc_column_text][\/vc_column_inner][\/vc_row_inner][vc_row_inner el_id=&#8221;faq_blog&#8221;][vc_column_inner][vc_custom_heading text=&#8221;Frequently Asked Questions&#8221; font_container=&#8221;tag:h2|text_align:left|color:%23001316&#8243; use_theme_fonts=&#8221;yes&#8221; css=&#8221;&#8221;][\/vc_column_inner][\/vc_row_inner][vc_tta_accordion active_section=&#8221;1&#8243; el_id=&#8221;faq&#8221;][vc_tta_section title=&#8221;What is loss aversion in investing?&#8221; tab_id=&#8221;1741079230451-13e329ac-9da6&#8243;][vc_column_text css=&#8221;&#8221;]<span style=\"font-weight: 400;\">Loss aversion in behavioural finance is when people feel worse about losing money than they feel good about gaining the same amount. This can lead investors to be overly cautious and make irrational decisions, like avoiding profitable opportunities or keeping underperforming assets.<\/span>[\/vc_column_text][\/vc_tta_section][vc_tta_section title=&#8221;How does loss aversion lead to bad decisions?&#8221; tab_id=&#8221;1741079230472-791d4a2a-0c22&#8243;][vc_column_text css=&#8221;&#8221;]<b>Loss aversion in investing<\/b><span style=\"font-weight: 400;\"> makes investors act against their long-term interests. For example, it can cause:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Holding onto losing investments for too long<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Prematurely selling winning investments\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Overreacting to market volatility\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Avoiding potentially profitable risks.<\/span><\/li>\n<\/ul>\n<p>[\/vc_column_text][\/vc_tta_section][vc_tta_section title=&#8221;How can investors overcome loss aversion?&#8221; tab_id=&#8221;1743190878073-d3df1fa4-9993&#8243;][vc_column_text css=&#8221;&#8221;]<span style=\"font-weight: 400;\">To overcome <\/span><b>loss aversion in investing, <\/b><span style=\"font-weight: 400;\">first acknowledge the bias and then use these strategies to reduce its impact:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Focus on long-term goals<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Systematic investment approaches\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Diversification\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Establish clear strategies<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Seek professional guidance<\/span><\/li>\n<\/ul>\n<p>[\/vc_column_text][\/vc_tta_section][vc_tta_section title=&#8221;What are the best strategies to manage investment risks?&#8221; tab_id=&#8221;1743192545662-2f8bb490-de5c&#8221;][vc_column_text css=&#8221;&#8221;]<span style=\"font-weight: 400;\">To manage risk in investing effectively, use a mix of strategies to reduce exposure to potential losses:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Systematic Investment Plans:<\/b><span style=\"font-weight: 400;\"> These involve making regular contributions to help reduce the impact of market volatility.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Stop-Loss Orders: <\/b><span style=\"font-weight: 400;\">Automated orders sell an asset when its price drops below a set level to reduce losses.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Rebalancing Your Portfolio:<\/b><span style=\"font-weight: 400;\"> By adjusting your asset allocation regularly, you ensure your portfolio matches your risk tolerance and goals.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Continuous Learning and Monitoring:<\/b><span style=\"font-weight: 400;\"> By staying informed about market trends and reviewing your investment strategy, you can adjust to changing conditions and avoid behavioral pitfalls.<\/span><\/li>\n<\/ul>\n<p>[\/vc_column_text][\/vc_tta_section][\/vc_tta_accordion][\/vc_column][\/vc_row][\/vc_section]<\/p>\n<p><script type=\"application\/ld+json\">{\"@context\":\"https:\/\/schema.org\",\"@type\":\"BlogPosting\",\"mainEntityOfPage\":{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.torusdigital.com\/toruscope\/investment-guide\/why-loss-aversion-causes-bad-investment-decision\/\"},\"headline\":\"Why Loss Aversion Leads to Poor Investment Decisions & How to Avoid It\",\"description\":\"Discover how loss aversion impacts your investment decisions and causes emotional reactions. 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This helps to buy more units when prices are low and fewer units when prices are high, reducing the average cost per unit. By doing this over time, one can minimise the impact of short-term price fluctuations and smooth out market volatility.\"}},{\"@type\":\"Question\",\"name\":\"What is loss aversion in investing?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"Loss aversion in behavioural finance is when people feel worse about losing money than they feel good about gaining the same amount. 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Focus on long-term goals Systematic investment approaches Diversification Establish clear strategies Seek professional guidance\"}},{\"@type\":\"Question\",\"name\":\"What are the best strategies to manage investment risks?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"To manage risk in investing effectively, use a mix of strategies to reduce exposure to potential losses: Systematic Investment Plans: These involve making regular contributions to help reduce the impact of market volatility. Stop-Loss Orders: Automated orders sell an asset when its price drops below a set level to reduce losses. Rebalancing Your Portfolio: By adjusting your asset allocation regularly, you ensure your portfolio matches your risk tolerance and goals. Continuous Learning and Monitoring: By staying informed about market trends and reviewing your investment strategy, you can adjust to changing conditions and avoid behavioral pitfalls.\"}}]}<\/script><meta property=\"og:title\" content=\"Why Loss Aversion Leads to Poor Investment Decisions &#038; How to Avoid It\"><meta property=\"og:site_name\" content=\"Torus Digital\"><meta property=\"og:url\" content=\"https:\/\/www.torusdigital.com\/toruscope\/investment-guide\/why-loss-aversion-causes-bad-investment-decision\/\"><meta property=\"og:description\" content=\"Discover how loss aversion impacts your investment decisions and causes emotional reactions. Learn how to avoid this bias for smarter, more rational investing.\"><meta property=\"og:type\" content=\"website\"><meta property=\"og:image\" content=\"https:\/\/www.torusdigital.com\/toruscope\/wp-content\/uploads\/2025\/03\/Why-Loss-Aversion-Causes-Bad-Investment-Decisions-How-to-Avoid-It.webp\"><meta name=\"twitter:card\" content=\"summary\"><meta name=\"twitter:site\" content=\"Torus Digital\"><meta name=\"twitter:title\" content=\"Why Loss Aversion Leads to Poor Investment Decisions &#038; How to Avoid It\"><meta name=\"twitter:url\" content=\"https:\/\/www.torusdigital.com\/toruscope\/investment-guide\/why-loss-aversion-causes-bad-investment-decision\/\"><meta name=\"twitter:description\" content=\"Discover how loss aversion impacts your investment decisions and causes emotional reactions. Learn how to avoid this bias for smarter, more rational investing.\"><meta name=\"twitter:image\" content=\"https:\/\/www.torusdigital.com\/toruscope\/wp-content\/uploads\/2025\/03\/Why-Loss-Aversion-Causes-Bad-Investment-Decisions-How-to-Avoid-It.webp\"><\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"[vc_section el_id=&#8221;blog-inner-layout&#8221;][vc_row overlay_dotted=&#8221;&#8221;][vc_column el_class=&#8221;blog_primary&#8221;][vc_row_inner][vc_column_inner][vc_column_text css=&#8221;&#8221;]Investing involves both psychology and numbers. Market trends, valuations, and economic indicators are important, but human emotions influence how investors respond to financial risks. Loss aversion is a key bias that affects investment decisions. It can cause irrational choices, leading to missed opportunities or unnecessary losses.\u00a0 This article will discuss loss","protected":false},"author":1,"featured_media":4907,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_sitemap_exclude":false,"_sitemap_priority":"","_sitemap_frequency":"","footnotes":""},"categories":[279],"tags":[],"class_list":["post-4467","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment-guide"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Why Loss Aversion Leads to Poor Investment Decisions &amp; How to Avoid It<\/title>\n<meta name=\"description\" content=\"Discover how loss aversion impacts your investment decisions and causes emotional reactions. Learn how to avoid this bias for smarter, more rational investing.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.torusdigital.com\/toruscope\/investment-guide\/why-loss-aversion-causes-bad-investment-decision\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why Loss Aversion Leads to Poor Investment Decisions &amp; How to Avoid It\" \/>\n<meta property=\"og:description\" content=\"Discover how loss aversion impacts your investment decisions and causes emotional reactions. Learn how to avoid this bias for smarter, more rational investing.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.torusdigital.com\/toruscope\/investment-guide\/why-loss-aversion-causes-bad-investment-decision\/\" \/>\n<meta property=\"og:site_name\" content=\"Blog\" \/>\n<meta property=\"article:published_time\" content=\"2025-03-28T23:13:04+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-08-08T13:49:46+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.torusdigital.com\/toruscope\/wp-content\/uploads\/2025\/03\/Why-Loss-Aversion-Causes-Bad-Investment-Decisions-How-to-Avoid-It.webp\" \/>\n\t<meta property=\"og:image:width\" content=\"1440\" \/>\n\t<meta property=\"og:image:height\" content=\"465\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/webp\" \/>\n<meta name=\"author\" content=\"torus\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"torus\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"6 minutes\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Why Loss Aversion Leads to Poor Investment Decisions & How to Avoid It","description":"Discover how loss aversion impacts your investment decisions and causes emotional reactions. 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