Behavioral Finance: Loss and Regret Aversion

September 25, 2014

Loss aversion suggests that investors tend to be disproportionately risk averse in relation to their expected outcomes in order to avoid the pain associated with financial loss.

  • Prospect Theory proposes that investors’ decision-making processes are contingent on the perceived values and costs of gains and losses, rather than the likelihood of each outcome.
  • Loss aversion suggests that investors tend to be disproportionately risk averse in relation to their expected outcomes in order to avoid the pain associated with financial loss. 
  • Regret aversion posits that investor indecision and failure to take action typically stems from wanting to avoid responsibility for a poor result

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