Loss Aversion
Loss aversion is the empirical fact that losses hurt more than equal gains please — a kink at the reference point, not a risk-aversion parameter.
Definition
Loss Aversion refers to a kink at the reference point, not a risk-aversion parameter. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It shows up in factor research, attribution, and capacity debates — whether a return slice is skill, style, or fee drag. When a kink at the reference point, not a risk-aversion parameter shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what loss aversion is saying. If a kink at the reference point, not a risk-aversion parameter moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Check definition stability across universes, costs, and regimes before treating a backtest as portable. Prefer a short written null hypothesis for Loss Aversion: what would falsify the current reading in the next window?