Reality Blind - Vol. 1

Loss Aversion

Summary : Of the countless thousands of irrational behaviors and biases common to our unique species, we can cover but a few here. So we ’ ll focus on ones that have bearing on resource depletion, environmental limits, the coming economic transition and the other central issues of our time. One such bias is ‘ loss aversion ’ - the phenomenon whereby we care more about a loss than an equivalent gain. For example, if you start with $10,000 and invest it into a stock and make 10%, you now have $11,000. You get satisfaction, happiness, and a bit of a wealth endowment feeling. Then the stock goes down (by 9.09%) back to $10,000 – you are back to where you started – no gain, no loss – but you feel worse – much worse. Studies have shown that losing an equivalent amount of money “ feels ” twice as bad psychologically as gaining the same amount 49 . Why might we disproportionately react to losses? Evolutionarily speaking, for an organism living close to the survival edge, the loss of an energy dense meal could mean perishing, while the gain of an extra few days of sustenance might only lead to some free time and sleep. Sure enough, experiments on (other) animals shows that risk aversion is prevalent in the animal kingdom. 50 And in the human sphere, loss aversion has been observed and measured in such a wide variety of settings and circumstances that it is one reason why marketing and PR firms hire evolutionary psychologists.


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