Psychology of Investing

House-Money Effect

When investors have experienced a gain or profit, they tendency is to take on more risk. Gamblers explain this feeling as playing with the houses money. Investors are prepared to take on more financial risk after a success when their strategy or their risk aversion parameters are not aligned.

Snake-Bit (Risk Aversion) Effect

After experiencing a loss in the market, investors become less willing to take risk. This is referred to as snake bit or risk aversion effect. When taking a loss, investors feel they will continue to lose and avoid trading or taking risk.

Break-Even Effect

After losing trades, investors horizons get distorted and the only objective is to make back their losses. This is the break even effect.