Week 10: Loss aversion

The week the evidence against you is in your own handwriting, with dates on it — and the arithmetic of why waiting does not work.

10 May 2027committableyours to commit, and assessable

Read question 4 of your opening record — what would make you close it — and then read your position log beside it.

Find two dates. The date you closed something that was up. And, for anything you still hold at a loss, the date you bought it. Count the days between that second date and today.

The pattern almost everyone finds is that the first number is small and the second is large: winners sold within a fortnight, losers held since March. This is the disposition effect — realising gains early and deferring losses — and it follows from something that sounds harmless. A loss of a given size feels bigger than a gain of the same size. If closing at a loss is what makes the loss real to you, then not closing feels like not having lost, and the position stays open for reasons that have nothing to do with the position.

“I will sell when it comes back”#

This is the sentence the whole week turns on, and it has arithmetic.

Your holding is down 33%. A dollar is now 67 cents. To get back to where you started, that 67 cents has to become a dollar:

$1.00 / $0.67  =  1.493

It has to rise 49.3%, not 33%. The move you are waiting for is half again as large as the move that hurt you, and nothing about the position makes that more likely than it was before.

You have seen this arithmetic already. Week 5 showed that a fall of 50% and a rise of 50% leave you at 0.50 × 1.50 = 0.75, down a quarter after two moves that sound like they cancel. It is the same asymmetry, met from the other side: there, it explained why leverage is worse than its multiple; here, it explains why waiting is a worse plan than it feels like.

The deeper the hole, the more this bites. Down 50% needs +100%. Down 80% needs +400%. “When it comes back” is not a plan, it is a description of the size of the move you now require somebody else to deliver.

What holding it is actually costing#

The loss you can see is the one in the price. The one you cannot see is in the counterfactual column, and from week 4 you have been recording it.

Total it for the held position: what you would have if you had closed on the day you first thought about closing, against what you have now. That difference did not happen to you. You chose it, every morning, by not acting — which is the uncomfortable part, because it never felt like a decision.

And notice what a held loser is in the vocabulary of week 3. Holding it is a sizing decision you are making again each day, at today’s prices, without writing it down. If you would not open that position at today’s price and at today’s percentage of your account, you are holding it for a reason that is not about the position.

Why this one is on the assignment#

Nobody hands you this. It is available to every student in every market, it needs no crisis and no bad luck, and the evidence for it is already written in your own log with dates you wrote yourself. That makes it one of the six the final project will accept, and one of the easiest to evidence cleanly.

You are not being asked to take the disposition effect on authority. It is in your log or it is not. If your log shows the opposite pattern — losers cut quickly, winners held — bring it, because that is a finding too, and a rarer one than the room expects.

This week#

Three lines in the log, today:

1. The recovery your worst position now requires, as a percentage, computed the way it is computed above.
2. The counterfactual total for that position since you first considered closing it.
3. Whether you would open it today, at today’s price, at today’s size. Yes or no, and nothing else.

The third line is the one people leave until last and then decline to write.