It is known through significant psychological research that humans are very sensitive to loss. That means the sad feeling of loss is much stronger than happiness feeling of gain. This manifests itself in strange ways. For example, in the stock market, the possibility to avoid a loss makes people take wrong decisions – they delay selling a stock that they know will go down in price. However, as soon as a stock has gained some money, the instinct is to sell and take the money even though keeping it there is probably beneficial in the long run. Tell any person to optimize their portfolio and they will not sell the loss leader stock.
It appears that there is some logic in this argument that we get instinctively but this in un-voiced and has been highlighted in Steven Strogatz’s book.
Suppose your stock portfolio drops 50% one day but just as quickly gains 50% the next day. When that happens, simple maths shows us that the stock portfolio comes back to 75% of the price and not 100%. This is a 25% loss. Therefore, a big loss once implies that a significant decrease that may not come back to the original price. This may be why instinctively, we are more sensitive to loss and may actually protect us.