Read the passage below and answer the question:
"Behavioral finance demonstrates that investors suffer from asymmetric loss aversion: the emotional pain of losing one thousand dollars is psychologically twice as intense as the joy of gaining the same sum. Consequently, retail traders prematurely liquidate winning positions to lock in minor gains while holding depreciating assets indefinitely in futile hopes of breaking even."
According to the passage, how does loss aversion distort investor trading decisions?
Answer and explanation
Correct answer: D. traders prematurely sell winning assets while holding losing assets too long
- Step 1: Locate the direct behavioral consequence in the text: traders 'prematurely liquidate winning positions to lock in minor gains while holding depreciating assets indefinitely in futile hopes of breaking even'.
- Step 2: Loss aversion causes investors to exit profitable positions prematurely while irrationally holding losing positions.
Answer
traders prematurely sell winning assets while holding losing assets too long.
Why not the others: 'investors invest exclusively in risk-free government treasury bonds' describes extreme risk avoidance not stated in the passage; 'traders accurately predict all sudden macroeconomic equity market declines' is factually false; 'investors derive identical emotional satisfaction from financial gains and losses' contradicts the text's assertion that loss is twice as intense as gain.
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