Why We’re Wired to Panic-Sell at the Worst Time

The screen is red and getting redder. Your stomach drops, your thumb finds the ‘sell’ button, and a voice in your head calls it prudence. Nearly every investor knows the feeling. Research on how people handle risk suggests the impulse shows up before the reasoning does, and that it runs hottest right after prices have already fallen.

The engine is “loss aversion,” the finding that losing something registers more intensely than gaining the same amount. Daniel Kahneman and Amos Tversky made it central to prospect theory in their 1979 Econometrica paper on decision making under risk. A 1992 follow-up estimated the asymmetry at about 2.25 to 1.

The popular shorthand is that losses hurt roughly twice as much as equivalent gains feel good. That is an approximation, however, and the exact figure remains debated. A 2024 meta-analysis in the Journal of Economic Literature pooled 607 estimates and found an average of about 1.96.

Two reflexes amplify it. “Herding,” or following the crowd, topped a CFA Institute poll of 724 investment professionals. About 34% said it was the bias that most distorts investment decisions. “Recency bias” supplies the forecast. People naturally expect the recent past to continue.

An NBER working paper that studied six sets of investor expectations from 1963 to 2011 found they closely tracked past returns. Investors became bullish after gains and gloomy after losses. The SEC‘s investor bulletin describes what follows. A panic is “wide-scale selling” that sends prices sharply lower.

Does the impulse cost anything? Morningstar’s Mind the Gap study, published Aug. 13, 2025, estimated the average dollar in U.S. funds and ETFs earned 7.0% a year over the decade through Dec. 31, 2024, against 8.2% for the funds themselves, a 1.2-percentage-point annual shortfall it attributed to “the timing and magnitude of investors’ purchases and sales.”

That number is disputed. Four academics writing in the Financial Analysts Journal reworked the same sample and put the cost of poor timing at just 0.10% a year. Morningstar itself cautions against reading its gap as “a parable of ‘dumb money.'”