The origins of the expression “cut your losses” date to the early days of the London Stock Exchange, founded 1801. The original form was “cut short your losses” and was popularly attributed to the economist David Ricardo (1772–1823), though this maxim never appeared in any of his published works:
As I have mentioned the name of Mr. Ricardo, I may observe that he amassed his immense fortune by scrupulous attention to what he called his own three golden rules, the observance of which he used to press on his private friends. These were, “Never refuse an option when you can get it,” — “Cut short your losses,” — “Let your profits run on.” By cutting short one’s losses, Mr. Ricardo meant that when a member [of the London Stock Exchange] had made a purchase of stock, and prices were falling, he ought to resell immediately. — The Great Metropolis, vol. 1, London, 1837, 81.
David Ricardo, the celebrated political economist, was born in London, of a Jewish family, in 1772. His character for probity, industry, and talent, early procured for him the means of support; and becoming a member of the Stock Exchange, he accumulated an immense property. He is the author of many works on finance; and in 1819 was elected to parliament. Died, 1823. He had what he called his own three golden rules; the observance of which he used to press on his private friends. These were: —
“Never to refuse an option when you can get it.
“Cut short your loses.
“Let your profits run on.”
By cutting short one’s losses, Mr. Ricardo meant that, when a member had made a purchase of stock, and prices were falling, he ought to resell immediately. … ||437 These are indeed golden rules, and may be applied with advantage to innumerable transactions other than those connected with the Stock Exchange. — “A Practical Treatise on Business,” The Merchants' Magazine and Commercial Review, vol. 27, New York, 1852, p. 436f.
A brief biographical sketch of Ricardo prefacing this rule became part of financial lore and is still told today:
His name was David Ricardo. … He had received a very basic education in school and had joined his father's stock brokerage business when only 14 years old. Since then, he had established his own brokerage business where he primarily traded government securities. His motto, which has since been adopted by thousands of traders, was: Cut losses, let profits run. Following this rule (and presumably a number of others), he had become extremely wealthy. — Lars Tvede, Business Cycles: History, Theory and Investment Reality, 2006, 43.
The second and third rule have conflated to one, and both phrasal verbs have lost their particles. The shortening to a single aphorism occurred already in the 19th century:
This is the way to carry out Ricardo's rules, “Cut short your losses — let your profits run on.” — The Ohio Cultivator, - vols. 15-16 (1859-1860), 31.
Divorced from any mention of Ricardo, the maxim could vary:
Cut your losses. Your profits will take care of themselves. (Provided you let them.) — The Magazine of Wall Street, vols.1-2 (1907), 240.
We run our business the same as you handle your speculations. You cut your losses short and let your profits run. We do the same. —The Ticker and Investment Digest, vol. 5, 1909, p. 173.
An NGram shows that around 1900, cut your losses short began to be more frequent, most likely because of the more pleasing rhythm.
At the same time, more and more speakers were, as the 1852 Merchant’s Magazine article suggests, applying the maxim “with advantage to innumerable transactions other than those connected with the Stock Exchange.” The saying has entered general use divorced from any connection to stock trading and can describe getting out of any bad situation before it gets even worse.