When it comes to the concept of emotional loss vs. emotional win: why are we more emotional with a loss than a win in the stock market?
Attachment to Current State
We are more attached to our current state – what we have – than we are our future state. This also applies to other things like our friends, our money, etc.
For example: when it comes to our friends, we are quite attached to people we closely associate with and people we know. A death in the family would stir more emotion in us than the feelings we have toward gaining a new friend.
Same goes for our financial state; we are more attached to our current finances than our prospective finances. If I asked you, “Would you rather get $1000.00 now or a penny every day for the next 20 years?” – You would likely pick the $1000.00, because you are more interested in instant gratification.
This logic follows the same path as using your credit cards. If you're using your credit cards, you are trying to delay the emotional state of paying for something. It's money in the future that you have to pay back, so it doesn't feel as 'bad' as money you have to give up right away…
I hope these are good examples to show why we get more emotional by our losses than gains.
How Does this Apply to the Stock Market?
When it comes to emotional highs when things start 'tanking' (losses), I notice people begin to panic and don't follow the appropriate steps to stick to their plans. It's during these times that it is the most important to be mindful of your plan and stick with it...
When the stock is hitting higher, you need to do the counterintuitive thing: as you're reaping in the benefits, you need to remain in a calm state and sell some of your strength in case there are bad days ahead.
It is important to pay attention to what is going on internally, so you will be better at spotting what occurrences make you more emotional. When are you calm? When do you experience an emotional high?
You may notice you need to make changes to make yourself better off.