Sarah, a lecturer in behavioural finance, is preparing a case study for PGDM students to explore the concept of loss aversion and its effects on investment decisions. The case study revolves around a fictional character named Alex, a novice investor who recently entered the stock market.  Alex invested $10,000 in a technology company's stock after conducting thorough research. However, shortly after purchasing the stock, the market experienced a downturn, and the value of Alex's investment decreased by 20%. Despite believing in the company's long-term prospects, Alex finds it challenging to hold onto the stock due to fear of further losses.  Despite experiencing short-term losses, the technology company Alex invested in has strong fundamentals and growth potential. Discuss the importance of adopting a long-term investment perspective in overcoming loss aversion.  This case study illustrates the pervasive influence of loss aversion on investors' decision-making processes, particularly during periods of market volatility. 

Learning Objectives

1. What behavioural biases might Alex be experiencing as a result of loss aversion?

2. How might Alex's emotions and risk preferences impact his decision to sell or hold onto the stock?

3. Identify and discuss at least two strategies that Alex could employ to mitigate the effects of loss aversion on his investment decisions.

4. How might financial advisors or investment professionals assist clients like Alex in managing loss aversion?