Critically evaluate how loss aversion influences investment decision-making
Critically evaluate how loss aversion influences investment decision-making.
Introduction :-
Loss aversion in behavioral economics refers to the phenomenon in which an individual perceives an actual or potential loss to be psychologically or emotionally more severe than an equivalent gain. Loss aversion is the observation that people experience losses asymmetrically more than the corresponding gains. This overwhelming fear of loss can lead investors to irrational behavior and make the wrong decisions as Holding shares too long or too little. Investors can avoid psychological pitfalls by using strategic asset allocation strategies, thinking rationally, and not getting carried away by emotions. Loss aversion studies show that an investor experiences the pain of loss more than twice as much as the pleasure of making a profit. Investment decisions are related to the allocation of financial resources. Investors select the most suitable asset or investment opportunity based on their risk profile, investment objectives and expected return. Top-level management therefore handles the budgeting of capital and the allocation of funds to long-term assets. Managers who oversee business operations choose short-term investments to ensure liquidity and working capital.
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