Question

What is 'loss aversion' bias and how does it affect mutual fund investor behaviour?

Accepted Answer

The psychological tendency to feel losses more acutely than equivalent gains — causing investors to hold losing investments too long and sell winners too early — Loss aversion (Kahneman & Tversky) means the pain of a ₹10,000 loss feels roughly twice as intense as the pleasure of a ₹10,000 gain. In mutual fund investing, this causes: holding on to underperforming funds hoping to 'recover' to cost (disposition effect), and being reluctant to invest during market falls despite lower valuations. Distributors must help clients overcome this bias.