Behavior

Loss Aversion Says That The Pain Of Loss Is Stronger Than The Joy Of Gain

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We're going to flip a coin. If it lands on tails, you have to pay us $10. If it lands on heads, how much would you have to win for this bet to be worth it? If it's anything more than $10—and we're willing to bet it is—that's loss aversion in action. This trick of psychology says the pain of losing something is greater than the joy of gaining something.

Related: The Gambler's Fallacy Is A Costly Misunderstanding of Chance

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Where You See It

This concept was coined by legendary psychologists Amos Tversky and Daniel Kahneman way back in the early 90s. The coin-flip scenario above comes from a real experiment Kahneman performs in his university classes. So how much do students want to win before the $10 gamble is worth it? As Kahneman told The New York Times, "People want more than $20 before it is acceptable. 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."

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This plays out in plenty of other situations. You're less likely to sell something for $10 than you are to buy it for $10. You're less likely to walk away from a blackjack table when you've lost a hand than when you've won one. You're more likely to become politically involved when your rights are threatened than you are if there's a vote on a law that would give you more rights—in the U.S., this played out brilliantly with the Affordable Care Act, which wasn't very popular when it passed but received an uproar when the new administration moved to repeal it. Loss aversion is even an explanation for why people stay in dead-end jobs: the fear of losing a steady paycheck is greater than the potential happiness of finding a job you really love.

Should You Trust It?

"Is loss aversion irrational?" Tversky and Kahneman ask in their paper on the subject. Their answer: not technically. As they say, you put value on consequences based on how you'll feel about those consequences. Evolution has made pain a more urgent matter than pleasure, since avoiding pain is the thing that can keep you alive to procreate.

Related: The Framing Effect Shows How Word Choice Affects Your Decisions

So yes, it makes sense that you'd avoid loss more than you'd seek to gain. But that doesn't mean it's always wise. What might you do if you weren't afraid of losing what you had? When faced with a decision you fear might be affected by loss aversion, the New York Times's Carl Richards suggests using what he calls the Overnight Test. His test deals with money and investments, but you could potentially use it for anything. Take something you're afraid of losing, even though you know you'd be better for losing it—camping equipment you're never going to use, a dead-end job, even an unpleasant friendship. Imagine you went to bed, and overnight someone got rid of it (sold the equipment for cash, got you a different job, ended the friendship). The next morning, you could choose to get back the thing you lost, or stick with the new situation. What would you do? If you'd stick with the new situation, there's your answer—lose what's holding you back and get on with your life.

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Would You Take This Bet?

Derek Muller of Veritasium takes Kahneman and Tversky's coin-flip scenario to the streets.

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The Economics Of Loss Aversion

Learn more about how this phenomenon plays out.

Behavioral Economics

Get a bird's-eye view of the academic area that Kahneman and Tversky created.

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