Revenge Trading as a Loss-Induced Behavioural Anomaly: Investor Cognition, Emotional Biases, and Financial Performance

Abstract

The expanding participation of retail investors in financial markets has intensified scholarly attention towards behavioural deviations from rational decision-making. Among these, revenge trading represents a consequential yet underexplored phenomenon, characterised by investors’ tendency to engage in impulsive and highrisk trades following financial losses in an attempt to recover them. This paper presents a critical review of the literature to examine the psychological and behavioural mechanisms underlying revenge trading within the framework of behavioural finance. Anchored in Prospect Theory, as developed by Daniel Kahneman and Amos Tversky, the analysis highlights how loss aversion, emotional responses, and cognitive biases shape post-loss decision-making. The review indicates that emotions such as regret, frustration, and overconfidence significantly impair rational judgment, leading to excessive risk-taking and overtrading. Furthermore, the increasing accessibility of digital trading platforms has amplified such behaviours by facilitating rapid and emotionally driven transactions. Despite its practical relevance, revenge trading remains conceptually underdeveloped and empirically underexplored, particularly in emerging market contexts such as India. The paper identifies key research gaps, including the absence of standardised measurement and limited empirical evidence, and outlines directions for future research. The findings offer important implications for investors, researchers, and policymakers seeking to promote more disciplined and rational trading behaviour.