Prospect theory, from Kahneman and Tversky, is the research base under most of trading psychology. Three pieces matter. Outcomes are judged as changes from a reference-point, not as final wealth. Losses hurt more than equivalent gains please, which is loss-aversion. And small probabilities are overweighted while near-certainties are underweighted.
Each piece has a direct market consequence. The reference point explains why your entry price dominates your thinking. Loss aversion explains why stops get widened and winners get cut, the pattern known as the disposition-effect. Probability distortion explains the appeal of far out-of-the-money lottos and the willingness to sell cheap tails.
Knowing the shape of the distortion does not remove it. It does let you design rules that pre-commit you against your own curve.
Related: loss-aversion, reference-point, probability-weighting, disposition-effect