Mitigating Loss/Gain Asymmetry ?

1. Oct 1, 2012

Aston08

In doing some calculations the other day I came across the concept of "Loss/Gain Asymmetry". After spending sometime searching I was only able to find cursory information on the subject was hopeing someone mind be able to answer a question I had on the subject.

In a scenerio where a 100 units of something are acquired at a specific price and the value proceeds to increase by 100% promptly followed by a 60% loss in value. Due to the asymmetical nature of Gain/Loss ratio the remaining value would then have to increase in value 150% to return to its previous peak.

....Alright I fully understand things up to this point.

Obviously only through the benefit of hindsight would anyone know exactly how low the value would go, but after the 100% gain we know that anything greater than a 50% loss would effectly be like buying a depreciating asset to begin with.

My question is would there be someway to mitigate the asymmetry by bleeding off (selling) a certain number of units at a given rate to create a bias closer to the peak value? Clearly selling at the peak would be the most efficient, but since that value is only known in retrospect there is going to be a certain level of inefficiency that is unavoidable.

I know in finance the concept is referred to as "Scaling" ...any idea how you calculate the bleed off rate depending on the amount of upward bias being sought ?

This probably isn't going to be a question with a definitive single answer, but I was hoping someone with better math skills than I have could help me chip away at the question.