Let’s gamble: we’re going to toss a coin. If it lands on tails, you’d pay $10; if its heads, how much would you have to win for this bet to be worth it? If its anything more than $10 — and we’re willing to bet it is. That’s loss aversion at play. This psychological trick states that the pain of losing something is greater than the joy of gaining something. Are you ready to bet?
Related media: Loss Aversion: A Trick Our Brains Play On Us In Gambling and Life
Heads Or Tails
The theory of Loss Aversion was proposed by two legendary psychologists: Amos Tversky and Daniel Kahneman back in the early 1990s. The coin-toss scenario aforementioned was a real-life scenario Kahneman often demonstrated in his university lectures. How much do you think his students would wish to win before they’d bet?
“People want more than $20 before it is acceptable.” Kahneman toldThe New York Times. “And now I’ve been doing the same thing with executives or very rich people, asking about tossing a coin and losing $10,000 if it’s tails. And they want $20,000 before they’ll take the gamble.”
This plays out in our everyday lives. Here are a few real-life scenarios: Are you willing to sell something for $1000 rather than buy it for the same price? Of course, you’d rather sell an item for $1000 and get the cash, than to buy it for the same $1000 and lose your money — even if you really need that item. Or, would you keep on betting when you’re losing and losing? Obviously, you’re more likely to give up on a poker game when you lose than placing a bet again. You’re wise enough.
You’re more likely going to be more politically involved when your rights are threatened than you are if there’s a vote on a law that would give you more rights. For instance, in the United States, this played out spectacularly with the Affordable Care Act — also known as Obamacare — which wasn’t very popular when it passed, but received an uproar when the new administration moved to repeal it.
Would You Win Or Lose?
Loss aversion could even explain why people stay in dead-end jobs even if there’s the opportunity of finding a much better paying career. The fear of losing a steady paycheck is greater than the potential happiness of finding a job you really love. “Is loss aversion irrational?” Tversky and Kahneman ask in their paper on the subject. Their answer: technically not. As they say, you always place more value on consequences based on how you’ll feel about those consequences.
Humans as a rational species, place value on pleasure more than pain — we seek pleasure and avoid pain at all cost. Evolution has made pain a more urgent matter more appealing to us than pleasure — since avoiding pain is your safest bet on how to survive than to die. So, of course, it totally makes sense that you’d avoid losing more than the risk there is to seek gain. But is that always a wise choice? What if there’s a chance of never losing what you had. Would you take the risk?
We Bet You Don’t Wanna Lose
According to The New York Times’ writer Carl Richards, when you’re faced with a decision you fear might be affected by loss aversion, he suggests using a hypothetical test he calls the ”Overnight Test.” In his hypothetical test, it usually involves money and investments, but you could potentially apply it to any scenario. For instance, consider something you’re scared of losing, even though you’d be alright if you lose it — say your significant other, a dead-end job, or even your smartphone.
Now imagine you go to bed, and overnight, someone ended your relationship, got you a better paying job, and bought you the latest iPhone. You wake up the next morning: Would you want your things back, or you’d move on with the change? If you’d stick with the new situation, there’s your answer — lose what’s holding you back and get on with your life. After all, we all have to sacrifice one thing or the other to make progress in life. Like they say, it takes money to make money. No Pain, No Gain.
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Written by: Nana Kwadwo, Wed, Jul 10, 2019.