Economics Loss Aversion Questions
Loss aversion impacts investment risk tolerance by making individuals more risk-averse. Loss aversion refers to the tendency of individuals to feel the pain of losses more strongly than the pleasure of gains. As a result, individuals are more likely to avoid taking risks that could potentially lead to losses, even if the potential gains outweigh the potential losses. This aversion to losses can lead individuals to have a lower tolerance for investment risks, as they are more inclined to choose safer and more conservative investment options to avoid the possibility of losses.