Loss Aversion: Revealing Why You Cannot Handle Losing

Loss aversion is a cognitive bias in which the same situation is perceived as worse if it is seen as a loss. Losses tend to be treated as if they are twice as bad as the equivalent gain. In simple terms, losing something is more painful than gaining the same amount. This concept is most commonly applied to money, but it can extend to losing time, social status, possessions, or even opportunities. The discrepancy often motivates the choices we make, leading us to cling to what we already know and have rather than acquiring new objects and/or opportunities.

Imagine you come across a 100 dollar bill while walking down the street. You’re ecstatic for a little while with the Benjamin in your collection, and you move on about your day. But what if you drop 100 dollars somewhere instead? The overwhelming disappointment from this loss would be greater for most people than the joy of finding and picking up the same bill. According to the research, it would take roughly twice as much of a gain to make up for the psychological torment of the loss. This fear doesn’t sound too daunting until you infer that it prevents us from taking even well-calculated risks when there is a potential to lose.

Loss aversion is particularly abundant and present in finance. In how we spend and manage our hard-earned money. Financial decisions obviously have downstream effects on nearly every realm of our lives. So if we fail to make sound decisions financially and miss out on potential gains, we can ruin our lives in the process. We are less likely to buy stock if there is a risk of losing money. It grows stronger as the stakes grow higher. This can make us hold onto failing investments and avoidant of lucrative opportunities due to a fear of failure.

Any field where we can “invest” ourselves has it’s form of loss aversion. We’re biased to hate losing. Thanks to this, we might preserve old relationships even when they are toxic. The thought of cutting ties can be too terrifying to even ponder on. Meanwhile, we’ll see new connections as less valuable since they inherently carry risks of their own. Same applies to career opportunity. There is an anxiety around losing the security of our current job unless we are guaranteed a more opportunistic position—which never happens. This reluctance causes individuals to stay in jobs, partnerships, businesses, trades, relationships, that no longer fulfill them, simply to avoid the discomfort of the unknown.

Losses are weighed disproportionately. The last sentence is loss aversion in sum. It’s why losing a 10 dollar bill is more upsetting than finding a 10 dollar bill is satisfying. It’s why you would rather a treatment that guarantees a 90 percent survival rate over a treatment with a 10 percent death rate—even though the outcomes are identical. It explains why selling your beloved bike that you no longer use feels like a gigantic loss. Human psychology values safety. Losses signify danger. The brain is wired for negative stimuli to be more intense than positive alternatives. In sum, you value not losing above winning.

Real life implications of loss aversion:

• Finance: loss aversion drives emotional responses in investing, such as selling your assets during economic downturns because you perceive losses; counteract this by focusing on the long-term, setting up an automatic rebalancing system to eliminate emotionality;

• Negotiation: you can frame offers in terms of avoiding losses rather than gaining benefits for compliance, like saying “By not upgrading, you risk downtime costs.” in place of “Upgrading saves you money.”;

• Marketing: leverage loss as a brand to motivate urgency, using things like limited stock, countdowns, and other campaigns centered on losses—“Only two seats left!”—to drive action;

• Health: you are more likely to stick to a treatment plan or fitness incentive if you frame it in a way that avoids a loss, such as “If you don’t exercise, you risk developing heart disease and dying an early death.” rather than “Exercise is good for your heart.”

How you might use loss aversion as a mental model: (1) view your losses as investments in future gains, realizing that spending on, say, professional development now is an upfront investment for long-term rewards; (2) use data to decouple emotion, focusing on historical data and plans to avoid panic decisions; (3) pre-commit, setting defined rules for decisions to bypass your emotions when you are at your lowest; (4) mentally visualize losses and gains to familiarize yourself with and evaluate whether the feeling of losing is disproportionate—before passing something up, imagine the regret of missing out versus the consequence of failure; (5) practice detaching yourself from the outcomes.

Thought-provoking insights. “A bird in the hand is worth two in the bush.” highlights how we overvalue what we already have due to a fear of losing. “Do not fear death so much, but rather the inadequate life.” it is not always better to listen to our loss-averse instincts, as they may keep us from living up to our potential. “The wolf loses no sleep over the opinions of sheep.” encourages that you focus on meaningless pursuits in lieu of chasing approval. Short-term fears should not dictate your long-term decision-making. Don’t let them.

Questions to reflect on:

1. How does the fear of losing something affect how I make decisions?

2. What opportunities have I missed because I was focused solely on avoiding losses?

3. How can I reframe my mindset to concentrate on potential gains rather than losses?

4. How do I recognize and address loss aversion in my financial decision-making?

5. How would seeing through the lens of gains rather than losses affect my problem-solving process?

Quotes about loss aversion:

1. "You miss 100% of the shots you don't take." - Wayne Gretzky, professional ice hockey player.

2. "To dare is to lose one's footing momentarily. Not to dare is to lose oneself." - Soren KierkeGaard, Danish philosopher.

3. "The fear of loss is a path to the Dark Side." - Yoda, character from Star Wars.

Example use cases:

1. Investments: investors often exhibit loss aversion by holding on to tanking stocks for too long to avoid realizing a loss. To counteract this, you can diversify your portfolio and shift the focus to long-term growth rather than short-term fluctuations.

2. Marketing: marketers leverage loss aversion in their campaigns by framing offers in terms of potential losses than gains. For instance, a limited-time discount that is about to expire can prompt us to act quickly to avoid missing out.

3. Negotiations: in negotiations, you can make concessions to avoid the perceived loss of a deal. Understanding this bias as a negotiator can make you take a more balanced stance, considering both gains and losses objectively.

4. Health: you might avoid medical tests or treatments due to the fear of potential negative outcomes. Do know that you help yourself by detecting disease early and treating it, thus view check-ups in a positive light.