How Can Understanding Cognitive Biases Mitigate Losses in a Death Spiral?

Understanding cognitive biases can help mitigate losses in a death spiral by enabling investors to recognize and counteract their own irrational tendencies. For example, by being aware of loss aversion, the tendency to feel the pain of a loss more strongly than the pleasure of an equivalent gain, investors can avoid holding onto a failing asset for too long.

Recognizing herd behavior can help an investor resist the urge to panic sell simply because everyone else is. By developing a pre-defined trading plan with clear entry and exit points, and by adhering to it strictly, investors can reduce the influence of biases like fear and greed.

This disciplined approach allows for more rational decision-making, even in the midst of a chaotic market.