Here’s an all-too-common scenario: You buy shares of stock at $25 with the intention of selling it if it reaches $30. The stock hits $30, and you decide to hold out for a couple more dollars in gains. The stock reaches $32, and greed overcomes rationality. Suddenly, the stock price drops back to $29. You tell yourself to just wait until it hits $30 again. This never happens. You finally succumb to frustration and sell at a loss when it hits $23.
In this scenario, it could be said that greed and emotion have overcome rational judgment. The loss was $2 a share, but you actually might have made a profit of $7 when the stock hit its high.
These paper losses might be better ignored than agonized over, but the real question is the investor’s reason for selling or not selling. To remove human nature from the equation in the future, consider using a limit order, which will automatically sell the stock when it reaches your target price. You won’t even have to watch that stock go up and down. You’ll get a notice when your sell order is placed.