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Risk-Reward

By: From the Global-View Forums This had led to more than one trader's demise (e.g. letting a losing trade ride in the hope of recouping a loss until it wipes out an account). Stockholm za 14:09 GMT April 24, 2009  Risk-Reward   Prospect theory suggests that people respond differently to equivalent situations depending on whether it is presented in the context of a loss or a gain. Typically, they become considerably more distressed at the prospect of losses than they are made happy by equivalent gains. This 'loss aversion' means that people are willing to take more risks to avoid losses than to realize gains: even faced with sure gain, most investors are risk-averse; but faced with sure loss, they become risk-takers. According to the related 'endowment effect', people set a higher price on something they own than they would be prepared to pay to acquire it.- Shiller