Prospect Theory

A theory of how people judge gains and losses, most famously that losses hurt more than equal gains feel good.

Developed by Daniel Kahneman and Amos Tversky, prospect theory found that people evaluate outcomes relative to a reference point and weigh losses roughly twice as heavily as equivalent gains. This loss aversion explains why investors often hold losing stocks too long, hoping to avoid locking in a loss, while selling winners too early to lock in a gain.

Prospect theory explained why he clung to the falling stock, unwilling to accept the loss, while selling his winners the moment they turned green.