Loss Aversion: Why We Make Poor Choices
Have you ever wondered about the prime motivators that drive many of your decisions?
If you’re like a lot of people, you might assume that the primary driver is receiving pleasure. I mean, after all, we all want to do things that make us feel good, right?
Having fun, falling in love, watching your favorite sports team win the championships, or finally taking that trip to Italy you’ve always wanted are some good examples.
In fact, though, psychologists have determined our daily decisions are largely dominated by loss.
Yes, you heard me right! Turns out people hate losing more than they enjoy gaining something.
In fact, it’s twice as powerful! Studies have shown that for a person to accept something positive, it would have to be at least twice the perceived value of what they could potentially lose.
Say you were to lose $100 today. The emotional and psychological impact of that loss would be twice as strong as the pleasure you’d feel finding a $100 bill.
Loss vs Gain
This phenomenon is called Loss Aversion and it’s a psychological tendency we experience every day that we’re rarely conscious of.
Loss aversion can be so strong that people are more likely to lie and cheat to avoid losing something they already have, rather than acquire it in the first place.
Why? Because loss aversion is an expression of fear.
Most of the time, that fear is based on losing something we already have, so we tend to focus more on potential setbacks or challenges than any potential success.
It’s an integral part of the way we think and manage our risk exposure in everything we do.
From picking a life partner to selecting a new car, loss aversion has been broadly used to study how people assess uncertainty.
Loss Aversion and Marketing
In fact, loss aversion is strongly incorporated into the way products are marketed to consumers every day.
Those limited-time sales you see all the time? That’s loss aversion in real-time.
Buy now and gain "X" or lose your golden opportunity forever! It’s gotten more than a few avid shoppers up at 4 am to be first in line at a store on Black Friday.
It’s also our default thought process in the way we manage or plan our financial future, start a new relationship, choose our jobs and so much more.
We think “how will I feel about this opportunity if it goes away?”.
Prioritizing Based On a Sense of Loss
I saw this constantly in my years as a senior downsizing specialist. A person may not have even known or remembered they had an item that had been packed away for decades in their garage.
But, when it surfaced and they were faced with the decision to give it away, it suddenly became the most important item they owned.
The same thing happens when a person is faced with an item potentially about to increase in value, like a Wall Street stock, a new home, or that favorite pair of Nike tennis shoes you’ve been eyeing for months.
Inevitably, there’s a run to purchase it because people don’t want to lose out and pay more.
So, why am I focusing on this topic today?
Because loss aversion is often behind some of the worst decisions we make in our lifetime.
Risk vs. Benefit
We all have had an occasion where we put more value on something of lower benefit, over a choice with higher benefit, because it has less risk.
For instance, we may be resistant to letting go of a relationship, not because it’s a positive one, but because we aren’t entirely sure we’re going to find a better one in the future.
That brings on more negative behavior where we work to justify to others, and to ourselves, why we’re staying in an unhealthy relationship.
It undermines our self-worth, clouds our vision, and pushes us into a big pit of denial because our ability to accept risk is so low.
The opposite of loss aversion is called risk tolerance. This is where you develop a more balanced way to assess risk and benefit.
You’re willing to tolerate moderate levels of risk, so you’re more open to considering the pros and cons of your decision, then act based on facts rather than emotion.
What We Value
And here’s something even more interesting. People who default to loss aversion in their decision-making usually feel they have more skin in the game. They’re invested.
They then assign more value to their choices than other alternatives, even if those options had a better chance of reaching success and happiness in the end.
It also means they are less likely to be open to new opportunities with similar risks in the future.
In fact, scientists have identified how loss aversion works via neuron paths in our brain. It physically changes our body's chemistry, not just our thought process!
Psychologists suggest that just being aware of our decision patterns, and the level of risk we’re willing to take, can improve our ability to make more informed and healthier decisions in the future.
Steps to Better Decisions
They also recommend several additional steps to take in this process.
1. Be open to thinking long-term.
Thinking short-term doesn’t allow you to see how processes can evolve nor allow you to grow that thinking long-term does. Thinking long-term can also allow you to be more flexible and creative about what you want and where you want to be in the future.
2. Get real about worst-case scenarios.
Loss aversion is at its peak when you envision life blowing up on you. That only encourages fear and it’s unnecessary. Being honest with yourself about the likelihood that a worst-case scenario will actually happen will lower the sense of loss you feel and allow you to make calmer and more fact-based decisions.
3. Create a strong information filter.
To me, this is probably the most important of the three. Many people make decisions based on outside influences: their family, social media, or the news. Think for yourself based on balanced research, using your common sense to step away from the emotions and filter out the bad information that is meant to heighten them.
Being aware of how loss aversion affects your life, your decisions, and your well-being is a great first step toward experiencing a calmer, more focused, and less fearful life.
So, I’ll leave you with these two questions. First, how many decisions have you made in the past where loss aversion was in play? Second, how would your life be different in the future if you did a better job of managing it moving forward?
So, until next time, my friend, as I always say….stay safe, stay healthy and stay strong!
P.S. If you'd like some help getting clarity on what's keeping you in an unhealthy repetitive behavior pattern, schedule a session with me today by clicking here.