The deep psychological mechanisms (evidence backed) Part-1
1) Loss aversion and Prospect Theory
People evaluate gains and losses relative to a reference point and losses “hurt” more than equivalent gains feel good. That bias drives many to hold losers (to avoid realizing a loss) and to sell winners too early (to lock a gain), a core explanation for the behaviour you described.
2) The Disposition Effect (empirical result)
Empirical studies of investors show people systematically realize profits more often than losses. This is exactly the “sell winners hold losers” pattern and it correlates with worse long term returns for individuals.
3) Dopamine reward system and near-miss effects
Trading outcomes trigger the brain’s reward circuitry. Wins produce dopamine spikes and near wins or “almost hits” also activate reward circuits causing continued chasing. That mechanism makes short term wins addictive and promotes impulsive chasing of small moves. Neuroscience and gambling disorder literature describe the same neurobiology.
4) Overconfidence, attention limits and confirmation bias
Traders overestimate their signal quality and fall back on fast intuitive judgements. Overconfidence increases trading frequency and reduces learning from mistakes. Confirmation bias causes traders to act on weak “signals” and ignore disconfirming data.
5) Stress arousal, limited capital and urgency to “recover”
When capital is small and losses hurt living standards traders feel urgent pressure to recover quickly. This stress increases impulsive decisions and risk taking creating a vicious cycle. Clinical work on gambling and trading addiction shows stress and impaired cognitive control worsen outcomes.
6) Structural factors matter: leverage margin and position sizing
Behavioral problems become catastrophic under high leverage. Liquidations happen when margin runs out. Using structured position sizing and limiting leverage directly prevents forced holding of losing positions and emotional breakdowns.
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