The daily scenery of the lottery line is a simple manifestation of our
tendency to avoid a loss: a ticket that could land you an exponentially
inflated reward, without paying too much to get into the contest.
The thing is, we live to possess, and if we lose the things we own, the
sting of it will be greater than the gain. We’re simply wired that way. That’s loss aversion.
It is difficult to part with the things we own. We have such a profound sense of possessive behavior that losing something is tantamount to losing a body part. Anything that we had called our own somehow has grown a neural link directly connecting to our nervous and pulmonary systems. Even at the prospect of losing something we possess, we already feel anxious, sad, and even angry.
Ironically, the more you possess things, the rate of your misery (of losing things) becomes exponentially higher because you have more to lose than gain.
Loss aversion is an expression of fear you did not know you had—or
you’re not often aware of. If the sting of a setback and defeat have a stronger impact on you than when you see progress, that’s loss aversion behavior at work.
In short, we don’t want to lose. We’d rather “not lose” than
“not win”. Though this seemed to be an odd phrase, psychologists actually found this to apply in competitive sports. By examining the facial expressions of athletes on the podium, they deduced that bronze medalists were generally happier than silver medalists. Bronze medalists feel they did not lose, while Silver medalists would curse underneath because they didn’t win gold.
If you’re still on the fence on whether to believe in loss aversion, the
next time someone challenges you to small bet, you’ll soon find out that you’ll get more upset about losing P20 than be happy you won P20. That’s because, according to the economist who found out all about this behavioral peculiarity (and won a Nobel Prize for it!), Daniel Kahneman, “losses hurt about twice as much as gains make you feel good”.
Turns out, loss aversion is a dangerous thing to behold, especially when it comes to money and investments. It will stop you from getting better offers and greater opportunities. Here are some
When we shirk from the idea of buying insurance because we feel we’re paying something that is not tangible. Generally, we want to buy something that we can hold in hands and feel that we own it.
When we purchase things that have little or no interest that will make
us feel we own them.
When we buy a share and not sell it below the price either because you have a sentimental attachment to it, or you simply don’t want to take a loss.
When you don’t want to sell a house or a car at a value that is less than you paid for it, even is said property has become a liability to you.
When you don’t want to change the status quo because you don’t want to lose your comfort zone.
When you approach a financial planner with the goal of building wealth and end up simply buying life insurance.
And so on and so forth.
Now, do you get the picture?
Theodore Marc Gutierrez is a Registered Financial Planner (RFP), freelance writer, speaker, and researcher specializing in behavioral finance. Next to writing, he designs old school card/board games as a hobby. He published his first book, Astronomer's Tales, in 2007.