Recently, I’ve been thinking about an interesting trading phenomenon: why do we stubbornly hold on when it’s time to cut losses, yet rush to sell when we should actually be holding? There’s a psychological concept behind this called the endowment effect, and it deeply influences every trader’s decision.

First, let’s talk about what the endowment effect is. Simply put, it’s that we often overestimate the value of what we already have. For example, if you bought a stock and even if the market price has fallen, you still feel it’s not that bad and can’t bear to sell. This isn’t rational analysis—it’s a psychological attachment.

This phenomenon actually comes from our fear of losses. Human beings naturally fear losing money, and the intensity of that fear is often much stronger than the joy of making a profit. So when we hold an asset, just the thought of losing it makes us feel uneasy, and we unconsciously assign it a higher value tag.

Here’s a very relatable everyday example that shows how powerful this effect can be. You might decide to buy a product you don’t really need just because you got a free trial. That’s because at the moment you try it, you psychologically feel like you already “own” it, so you’re more willing to pay for it. The same logic also applies to trading.

Traders often overestimate the value of their current positions—far higher than the actual market quote. This leads to many irrational decisions: even though the market tells you to sell, you just can’t let go because psychologically you’ve attached too much value to that position. On the flip side, when it comes to new investment opportunities, you hesitate because you think what you already have is more precious.

So how do you avoid falling into the trap of the endowment effect? Based on my experience, there are a few key points. First, force yourself to look at the actual market price rather than the price you want to see in your mind. It sounds simple, but doing it really requires discipline.

Second, make your trading goals clear. Know why you bought, and what kind of returns you want—so when you face your positions, you won’t be hijacked by emotions. Create a clear trading plan, including specific entry, stop-loss, and take-profit levels, and then follow it strictly. Even when the market is volatile, don’t waver.

Third, diversification of your investment portfolio really matters. When your funds are spread across different assets, you’re less likely to develop excessive psychological attachment to any single position. This also helps you evaluate more objectively whether each position is still worth holding.

It’s also necessary to review your portfolio regularly. Check whether your holdings still match your goals and whether they still have growth potential. This habit helps you spot risk signals in time, instead of having your eyes blinded by the endowment effect.

Finally, I recommend practicing with simulated trading. This way, you can test your trading strategy without risking real money. In many cases, our decision mistakes come from a lack of experience. Through simulated trading, you can quickly accumulate experience and gain a clearer understanding of how much the endowment effect affects you.

In the end, trading is about competing with your own psychology. Recognizing the presence of the endowment effect, understanding why it influences our decisions, and then taking specific actions to counter it—that’s the key to becoming a more rational trader.