Mental Accounting Bias

Say you invest $10,000 in a stock and it rises to $15,000. Convinced it will continue to rise, you hold. Later it falls to $8,000 and you sell. How much money did you lose?

If you said $2,000 – the difference between your original investment and the sale price – you’re guilty of mental accounting. The true loss is $7,000: the difference between the peak value and what you received when you sold.