In this article, we will explore the intricacies of financial decision-making and how to protect your investments in the stock market. We’ll delve into various heuristics and cognitive biases that...
Read MoreDecoding Losses: The Prospect Theory Guide
Have you ever wondered why some people end up losing money when trading? The answer lies in a psychological concept known as the “prospect theory.” In this article, we’ll unravel the mysteries behind trading losses and how our minds contribute to financial pitfalls. The Allure of Winning and the Fear of Losing Trading is a roller coaster of emotions. The prospect theory, as explained by Daniel Kahneman, sheds light on our tendencies when it comes to gains and losses. When losses occur, our brains literally register pain (the same neural regions associated with physical pain become active). The cruel reality exposed by the Prospect Theory is that the emotional impact of losses outweighs the impact of gains. Interestingly, the pain of losing money is often twice as intense as the joy of gaining it. The Dangers of Holding onto Losses The prospect theory plays a significant role in the financial