Quant · Core
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
In prospect theory the slope of the value function is steeper for losses (often cited ~2×). People reject fair small bets and take lousy hedges. It is not the same as risk aversion over wealth.
Why it matters
Premia for downside (skew, puts, ‘defensive’) have a demand side here. So does the refusal to stop a losing book.
Case
A PM who cuts winners at +1R and lets losers run to −4R. The Sharpe dies of the kink, not of the ideas.
How to read it
Find the reference (entry, high-water, benchmark). Size and stops should be written so the kink cannot run the book.
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