Behavioral Finance researcher (and Columbia Business School Ph.D.) Meir Statman uses the stock portfolio that Martha Stewart divulged during the course of her 2004 trial to illustrate the types of cognitive biases that so often plague investors, even those as rich and powerful as Martha. Between June 30, 2000 and December 20, 2001, Martha’s NASDAQ-heavy portfolio lost 46% of its value. In addition, 23 of her 36 stock positions at that time were losers, together totalling over a million dollars in paper losses. Just before she sold the shares of ImClone Systems that got her into hot water, she unloaded 22 of those 23 losing positions, sending this note to a friend:

Just took lots of huge losses to offset some gains, made my stomach turn.

Why is it that realizing what had previously been only a paper loss is so painful for investors? Shouldn’t it be the declining market price that is most painful, not simply the sale that realizes our loss? This bias hurts the performance of the portfolios of many investors. We are too slow to sell losers, letting money languish in a bad investment instead of selling it off and putting the money to more productive use. Financial advisors employ some psychological tricks to try and soften the pain of these realized losses. One is the well-known strategy of selling off losers in December for tax purposes. A sale that would be framed as an investment loss in November can be re-framed as simply a tax deducation if sold in December. Another technique is to “swap assets” by selling the losing position and immediately using the proceeds to buy into a new position.

Normal investors like swaps because swaps blur mental accounts and distract their attention from the fact that they are realizing losses. Consider the mental accounting benefits of swaps recommended by Gross in his manual for brokers: “The two separate transactions (moving out of the loss and moving into a new position) are made to flow together by the magic words ‘transfer your assets.’ The prospect thought he was making a single decision, switching one investment into another. He was not being asked to think in terms of selling XYZ…”

What can investors do to avoid the trap of holding losing positions too long? Statman proposes one such strategy — “loss harvesting”:

…a rule that mandates loss harvesting at the end of every quarter makes it easier to realize losses because it makes loss realization automatic. (Note also how the term “harvesting” creates a positive frame. Harvesting connotes sweet fruit, not bitter losses.)

Read more: Martha Stewart’s Lessons in Behavioral Finance, by Meir Statman