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Loss-aversion bias is demonstrated when an investor refuses to sell positions that are trading below their original cost in order to avoid realizing losses. By contrast, loss-averse investors tend to sell “winning” investments early in order to lock-in gains. Taken together, these tendencies are known as the disposition effect.The clearest indication of loss-aversion bias is when an investor holds on to losing investments. For example, Tiffany Jordan demonstrates loss-aversion bias in Practice Problem 7 at the end of this reading when she refuses to sell positions that are “significantly under water”.
     
 
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