Is Loss Aversion Real?

or is it just risk management

Loss Aversion - the idea of losses hurting more than gains works in marketing but not in reality. Yes, if I win a hundred dollars I’ll be a 5/10 excited about it and if I lose a hundred dollars I’ll be 8/10 disappointed.

Does that mean that losses hurt more than equal wins? I used to think it did, but I’m more skeptical now.

Taleb points out that we don’t consider how wired we are to hate risk. If I gain a hundred dollars, unless I was already at huge risk in life, then it’s just a monetary gain.

If I lose a hundred dollars, I start to think about my car payments, my Netflix subscription and the gifts I need to buy everyone for Christmas soon. I’m launched into base-level risk analysis mode. I think about how far I am from zero - big risk.

I think that’s why even small amounts of money lost can hurt. It’s a primal response to being in a worse position that you were just in. You became mentally at ease with a certain level of risk and suddenly it’s gotten worse. For the most part, I think that’s a binary reaction - either your risk analysis mode is turned on or it’s not.

I also think it’s a step function. For example, I don’t feel much different losing five dollars on ten dollars. I don’t feel a huge difference losing ten dollars or twenty dollars. But that only holds to a certain point. But if I lose fifty dollars, I’m more upset. Up to about a hundred dollars I think I’m equally upset.

Still working through the step function idea. Need to think harder, research and refine it. Test it. But this is my initial thought on it.

Takeaway: Loss Aversion is nothing new, losses hurt more because we already have lots of other risks in our lives.

Question on The Day

If you dropped a hundred dollar bill while walking on a busy city street, would you chase after it? For how long?

Your Friend,

Noah “BigNerd” Sochaczevski