I'm not quite sure what your point is here; you are making several different arguments that don't really make sense.
> I don't understand the mindset that losses aren't real until you convert them back into cash.
stocks, cash, real estate, etc are all assets, but they behave very differently. in particular, there are some very special attributes to cash: it can be directly exchanged for almost any other type of asset, and the prices of those assets are almost always denominated in cash. simple example: my lease says I owe $1000 each month in rent, not $1000 worth of any asset, but cash specifically. if I have $10k in cash, I can definitely pay rent for the next ten months. if I have $10k worth of some s&p 500 ETF, I a) can't pay rent without converting to cash first and b) risk being forced to sell at a time when my shares are worth less than $10k. I have a good chance of making rent for roughly 10 months, but there's a lot more that could go wrong. of course, cash itself does fluctuate in value just like other assets, but we are mostly insulated from that in the short term by the fact that most legal agreements are denominated in nominal dollars, and that the prices of most material things are much stickier than financial instruments. in short, this is why the concept of unrealized vs realized gains/losses makes a useful distinction.
> It just seems fundamentally wrong to me to consider different forms of money (cash, shares of an investment fund, casino chips, etc) as being distinct. Changing forms may have tax implications but it's not like the form protects you from loses in some way.
nothing is 100%, but different assets have sufficiently different risk profiles that it's worth distinguishing between them. cash is an extremely safe asset in the short term, but almost guarantees a loss in the long term. if you can identify buckets of money that you probably won't need for a long time, it has historically been a good bet to invest them in bonds/stocks/whatever based on your tolerance for risk. it doesn't guarantee a good outcome, but it avoids the guaranteed bad outcome of holding a lot of cash for a long time.
> If you keep your money in an underperforming investment it should be because you expect it to go up in the future, not because you are afraid of realizing a loss (which you have already suffered).
agreed, and this is a common mistake that people make. but this is more people applying the sunk cost fallacy to the concept of unrealized vs realized than an issue with the concept itself.