Loss Aversion vs. Logic: Why We May Hold On to Bad Investments

Have you ever held on to a falling investment, hoping it will bounce back? Many people continue with bad investment decisions because of loss aversion in investing. It's a common mental trap, where the pain of losing feels stronger than the joy of gaining.

Let's look at why this happens, how to recognise it, and how to avoid letting emotions ruin your investments.

• Table of contents

• What is loss aversion?
• How logic differs from emotion in investment decisions
• Common signs you're clinging to a bad investment
• The psychology behind holding losers
• Examples of loss aversion in action
• How to overcome emotional investing

What is loss aversion?

Loss aversion is a mental habit where we hate losing more than we enjoy winning. Losing Rs. 1,000 feels much worse than the happiness of gaining Rs. 1,000. So, we try hard to avoid taking a loss, even when it makes no financial sense. In investing, this often makes people hold onto poor-performing assets for too long. Loss aversion is among the significant behavioural biases in investment decisions. This and other biases are studied by behavioural finance, a field of research that looks at the interplay between psychology, emotions and finances.

How logic differs from emotion in investment decisions

When emotion says: “I’ve already lost so much. I can’t sell now”, logic says: “This money can be better used somewhere else”. Logic looks at numbers, facts, and future potential. Emotion looks at past losses, guilt, or hope. In this conflict between logic vs. emotion in finance, logic is what leads to growth. Emotions, when not checked, can lead to suboptimal investment decisions.

Also Read: What is behavioural finance?

Common signs you're clinging to a bad investment

• You keep checking the value daily, hoping for a miracle.
• You avoid selling because then the loss becomes “real”.
• You make excuses like “It will go up eventually”.
• You feel more relief from not selling than an actual gain.

If any of these feel familiar, you're likely influenced by emotion, not reason.

The psychology behind holding losers

We hold on to bad investments because we want to avoid regret–selling confirms we were wrong. We hope it will recover, even if there’s no sign it will. We anchor to the original price: “I bought at Rs. 100, so I’ll wait till it’s Rs. 100 again”. We fear missing out on a recovery, even if it never comes. All these are classic signs of emotional investing.

Examples of loss aversion in action

Let’s say Anita bought shares of a company at Rs. 500. Now it's at Rs. 300.

• Emotion: Anita says, “I can’t book a loss. I’ll wait.”
• Logic: A financial expert would say, “Sell now and invest in a better opportunity.”

How to overcome emotional investing

• Accept losses as part of the journey: Not every investment will be a winner.
• Focus on long-term goals: Don’t get stuck on short-term feelings.
• Remind yourself why you invested: If it no longer fits your goals, let it go.
• Don’t treat investments like relationships: Loyalty to an underperformer doesn’t pay.

Tools such as SIPs, diversification, exit rules, and a financial advisor or app can help overcome emotional investment. Using such tools builds financial discipline and reduces the power of behavioural biases in investment.

Conclusion

Loss aversion in investing is natural, but it can lead to long-term damage if not managed.
The key is to recognise when emotion is guiding your decision, and choose logic instead.
Knowing when to cut your losses is essential to smart investing.

Also Read: What are behavioural biases in decision-making?

FAQs

What is loss aversion in investing?

Loss aversion is the tendency to avoid losses because they feel more painful than the joy of gains. This often makes people hold on to bad investments for too long.

Why do investors hold on to losing investments?

Because of emotional reasons like hope, regret, or the need to avoid feeling like they made a mistake.

How can emotional bias affect investment decisions?

It can cause poor decisions like holding losers, panic selling, or ignoring facts, leading to losses or missed opportunities.

What are some strategies to avoid emotional investing?

Set an investment schedule and follow it strictly, determine exit rules, focus on long-term goals, and get help from advisors who can flag emotional decisions.

Can SIPs help reduce the impact of behavioural biases?

Yes, SIPs can bring discipline and reduce emotional decision-making by automating your investments.

At Bajaj Finserv AMC, we recognise that emotions are the cornerstone of investor behaviour – not just for investors but for investment professionals too. That’s why, behavioural finance is at the heart of our investment philosophy, InQuBe (Information Edge, Quantiative Edge and Behavioural Edge). By understanding, tracking and monitoring market sentiments and our own investment biases, we seek to make mindful and strategic investment decisions. Get the Behavioural edge by investing with Bajaj Finserv AMC. Read more about InQuBe here.