Risk aversion and loss aversion

Risk aversion and loss aversion are the two types of behaviors portrayed by people in

trading a d economics. The behavior exhibited is as a result of the reaction towards the risk and

losses that are illustrated by a certain investment. The two types of behavior include risk aversion

which entails reluctance in taking high risks to gain profits, and loss aversion involves a

willingness to incur high risks in a quest to prevent losses.

Risk Aversion

Naturally, a trader with risk aversion prefers engaging in situations that offer lower

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returns and also at a lower risk. This entails majorly keeping the losses at a minimal stance. This

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trait proves to be safe and great but on the other hand, may result in low profits as opposed to

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taking high risks. However, due to reduced losses, risk aversion assures higher profits as opposed
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to taking high risks that may result in a loss. Risk aversion is not based entirely on fear and

insecurity to lose but the desire to preserve and maintain the one's current state. Interestingly, a
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risk-averse trader faces no danger by taking a risk-averse stance. This can be perceived as a
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steady and safe strategy to investing. As much as the strategy is limited as far as the outcome is

concerned, it still is more secure since it eliminates severe losses. Nevertheless, risk aversion
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people also engage in loss aversion behavior when trading seem to go on their way. As exhibited

in the complexity of the human behavioral pattern, risk-averse people tend to engage in loss
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averse behavior at some glimpses along their trading patterns.

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Loss Aversion

This refers to the tendency of people to strongly favor avoiding losses at the expense of
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acquiring gains. However, most studies indicate that the probability of making losses is two

times psychologically as incurring gains. Loss aversion is controlled by urge and emotional

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 attachment that override the need to cut losses. Loss aversion involves continued high-risk

investment regardless of the trend in the trading session. The trader continues with the process

with the expectation of a significant shift in the outcome. The habit is so detrimental since it can

result in massive losses if not controlled in advance. However, several studies show the behavior

of loss aversion across the human beings to date back to the evolutionary period.

In a bid to counter the effects of losses during trading, strict rules should be set and

adhered to with the same magnitude and on the other hand addressing minimum profits and

losses daily target. In reference to set profits and losses, high losses creep in at the end of the

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trading day. This, therefore, impacts on losses which could be avoided. Similarly, losses incurred

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should be regulated basing on the minimum set amount of losses in a day. Continued trading

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which incur significant losses results in extreme high risks in a single day. Risk and loss
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aversion are the two common economic and trading habits that are deployed by various people in

trading. However, the motivating factors behind the adoption of each method are entirely
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attached to individuals’ target.

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