1. Many investors will not sell anything at a loss. They don't want to give up the hope of making money on a particular investment, or perhaps they want to get even (equal to purchase value) before they get out. The "get-evenitis" disease has probably wrought more destruction on investment portfolios than anything else. Investors who accept losses can no longer prattle to their loved ones, " Honey, it is only a paper loss. Just wait. It will come back."
2. People are not uniform in their tolerance for risk. It depends on the situation. Many appear to tolerate risk more readily when they face the prospect of a loss than they do not.
3. Dividends are labeled as income, not capital. And investors tend to frame dividends as income, not capital. Again, this is frame dependence. Investors feel quite comfortable choosing a portfolio of stocks that feature high dividend payouts and spending those dividends.
4. Imagine someone who makes a decision that turned out badly and engages in self-recrimination for not having done the right thing. REGRET is the emotion experienced for not having made the right decision. REGRET is more than the pain of loss. It is the pain associated with feeling responsible for the loss.
5. REGRET minimization also leads some investors to use dividends, instead of selling stock, to finance consumer expenditures. Those who sell stock to finance a purchase, only to find that shortly thereafter the stock prices soars, are liable to feel considerable regret.
6. There are several emotional issues regarding loss and gain, the most fundamental of which is that people tend to feel losses much more acutely than they feel gains of comparable magnitude. This Phenomenon has come to be known as LOSS AVERSION.
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