What does the term Loss Aversion describe?

Loss Aversion describes the psychological phenomenon where individuals disproportionately prioritize avoiding losses over acquiring equivalent gains. This concept is rooted in behavioral economics and suggests that the pain of losing is felt more acutely than the pleasure of gaining the same amount. As a result, people often make decisions influenced by their desire to prevent losses, even when the potential gains could outweigh those losses.

For example, an investor might hold onto a losing investment longer than is rational in the hope of breaking even, while being more willing to sell a winning investment to secure gains. This behavior is critical for understanding market psychology, as it can lead to suboptimal decision-making and influence market trends.

The other options reflect different aspects of behavior in decision-making but do not capture the essence of Loss Aversion as accurately as the correct answer. Seeking out potential gains speaks to a different behavioral tendency, while ignoring potential losses or approaching all risks equally does not encompass the nuanced way in which losses impact decision-making compared to gains. Hence, the accurate representation of Loss Aversion is the prioritization of avoiding losses over the desire to acquire gains.