What Is Prospect Theory?
Prospect Theory states that for every good result a person sees, 1 Unit of Emotion is gained. But when a bad result is seen, 2 Units are lost since a loss has twice the impact. Excessive checking can therefore lead to stress, leading to poor decisions. You might even end up abandoning a good-performing investment. The figures above are based on the book Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life by Nassim Nicholas Taleb.
The hypothetical examples contained herein are for illustrative purposes only. The examples do not take taxes and investment expenses into consideration, nor do they represent the performance of any particular investment. Actual results will vary. The information provided in this material should not be considered a recommendation to purchase or sell a particular security.
Source: Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, by Nassim Nicholas Taleb. Publisher: W. W. Norton & Company (October 2001) ISBN-10: 1587990717