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Is Loss Aversion the same as Risk Aversion?

  • Risk Aversion is the general bias toward safety (certainty vs. uncertainty) and the potential for loss. When faced with a choice of two investments with the same expected return, a risk averse investor will chose the one with lower risk. 
  • Loss Aversion is a pattern of behavior where investors are both risk averse and risk seeking. In simple terms, how often does a client sell a winning stock to capture gains while holding on to a losing position in the hope of not having to realize that loss? A common market mantra is that a one dollar loss in a position is twice as painful as a one dollar gain is pleasurable, and they cause different reactions. 

The behavioral influences here, from pride to fear, impact the overall decision-making process, and a SmartRisk analysis can help manage those behaviors by setting, upfront, some reasonable risk parameters.