Loss Aversion: The Hidden Killer of Progress

Clearly, I needed more information. And, it’s 10 p.m. on the night before deadline. To the well I go, yelling from the home office. “Honey, what do you psychologist types call it when you have a person that has all the facts in front of them to make a good decision, but goes the other way instead?”

He yelled back, “Watching TV right now.”

I shouted, “There’s a lager in it for ya.”

He replied, “Likely it’s ‘loss aversion,’ and I want a frosty glass too.”

Me, “I’m going need two paragraphs and a reference for a frosty glass.” Negotiation completed, here’s what we have from Otis Fulton, Turnkey’s shanghaied psychologist:

Psychology tells us that people are hard-wired to avoid losses. Indeed, loss aversion has an evolutionary history, going back to our prehistoric days as hunter/gatherers. It boils down to this–people who treated threats as more urgent than opportunities had a better chance to survive. In staff meetings and conference rooms we experience this emotionally—the fear of loss is stronger than the prospect of gains. That is what loss aversion means. (KV: In the wild, avoiding a lion today makes you more likely to pass on your genetic material than getting an antelope for dinner today. This tendency manifesting in the wilds of the conference room looks like your boss saying, “Yes, it does look like a good idea, but we don’t know what we don’t know. Let’s pilot this for a year and see what happens.”)

Princeton psychologists Daniel Kahneman and Amos Tversky won the 2002 Nobel Prize in economics for their work on how people make irrational, but predictable, judgments about these kinds of decisions. It turns out that you can measure your own loss aversion pretty simply. Ask yourself, what is the smallest gain that you would need to balance an equal chance to lose $100? For most people the answer is around $200—twice as much as the loss. Kahneman and Tversky’s research showed that the “loss aversion ratio” was in the range of 1.5 to 2.5, depending on the individual—some people are much more loss averse than others.

None of the above makes me particularly proud or hopeful for the human race. It sounds darned near impossible for the average human to make a decent decision. Even if the method or product you are changing to is twice as good as what are doing now, you are only just on the cusp of making that good decision. That is a high bar. And yet, we do ultimately change. Next week, effecting change in the face of the human bias of loss aversion. Write you then.