The Paper Loss Fallacy

I came across this old canard again today…

I then compounded the problem by selling at the bottom, when the shares were basically valueless anyway. At that point in time, I turned my “paper losses” into “real losses.”

This idea that paper losses aren’t real losses bothers me to an unreasonable degree. Wealth is fungible. Wealth can be stored in shares of stock or real estate or cash or whatever, it’s still wealth. If a person has an investment that has gone pear-shaped, his wealth has diminished whether he decides to sell the investment or not. It is a real loss in the sense that his net worth is less than it used to be.

My working theory on the origins of the paper loss fallacy shows that while there is no functional difference between an unrealized and realized loss (tax issues aside), there may be a benefit in perpetuating the myth when confronted by a skeptical spouse. Could be a survival response in some cases.