Nobody Likes Losing: Loss Aversion Explained

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Nobody likes change. This is a fundamental aspect of life that everyone can relate to. When things are shifted from something we're very familiar with to something we're not familiar with, we become uncomfortable. I go more in depth into this a little in a previous post about Nostalgia as well as my post about Stubbornness. Today I'm going to talk about how we hate to lose things more than we like gaining things. This concept, denoted as loss aversion, is actually at the center for a lot of why we do what we do. Humans are largely rational creatures, but forces like loss aversion can cause us to act seemingly irrationally. 

Loss aversion is exactly what it sounds like: it's an aversion to loss. More concretely it's the idea that the pain of losing something is greater than the pleasure of gaining something. The research that supports this is quite interesting. Loss aversion actually is closely related to status quo bias and the endowment effect. Status quo bias is an affinity toward keeping things with the status quo. The endowment effect states that people will ascribe more value to something when they are the ones that own it. Kahneman, Knetsch, and Thaler are sort of considered the academic pioneers of this family of ideas, as they've popularized these concepts and go into detail into each of them in their article published in the Journal of Economic Perspectives in 1991 titled Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.

Real quick let me go into the other two related concepts. Status quo bias is present in a lot of why we don't like change. We have an affinity to the status quo because well, things are going pretty okay for us for the most part. When we put that okayness into jeopardy by changing something or letting something go, it makes us anxious for the simple fact that in the future, maybe things won't be so okay. The endowment effect is similar, thought it has more to do with the thing itself we would be letting go. If we are going to let something go, we want to get something of equal value for it in return right? Well because of loss aversion and the fact that we don't like giving things up, that inflates the value of that thing to us, since we already have it. 

If I have something that's relatively valuable, let's use a bottle of wine for example (Kahneman and colleagues do). I drink it every now and then but not too often. I didn't spend a lot to obtain it but now, it has appreciated in value. I will value that item still higher than the now increased value simply because I have it. The pain of losing an item is so high, that what I would get in return for it needs to at least match that value in my mind. Why would I want to give something up for less than what I thought it was worth? This is human decision making at its finest: maximizing gains and minimizing losses. 

Let's say someone is considering selling their house. They've spent years and years in this house, grew up in it, and built countless memories there. Due to these principles, I can predict that that person will be substantially 1) more likely to overvalue the price of the house relative to the rest of the market (endowment effect) 2) not want to move to a place that is substantially different from where they currently live (status quo bias) and 3) be less inclined to sell their house at all knowing they're going to have to buy a more expensive house (loss aversion). This is all because we as humans hate losing things. It's wired into our psyches that losing = bad; in sports, TV, and just life in general losing is never a good thing.

Now these principles beautifully explain economics and human behavior in relation to the marketplace, but they also do an excellent job at explaining and predicting behavior outside of the economy. When we are faced with change, the fear of losing something we once had can often overpower the potential gain we get from something new. That idea of knowing that we lost something, that we no longer possess or have something we used to is so powerful it's used all over the world to influence consumers, friends or family, and even world leaders. One of the most persuasive things to us is the knowledge that we may lose something we have. Knowing that things will not only be different, but potentially worse is often enough to prevent us from creating change, even if that change is positive.

Another great example of loss aversion is bad relationships. People will often stay in relationships that are either not going anywhere or stay with a person they aren't really interested in anymore because of the fear of losing what they already have. Even if what they have isn't special or is even damaging, that idea that they would no longer have a significant other is enough to make them stay in that relationship.

This is especially true with our society putting an increasing amount of value on being in a relationship in the media and our daily lives. Every TV show or movie you see the main character falls in love and has a relationship or is seeking to have a relationship. When they're in a relationship the characters are happy and smiling and when they aren't they're much more somber and unhappy. This reinforces in our minds the idea that we literally cannot be happy if we're not in a relationship. A combination of this social pressure and loss aversion largely incentivizes us to stay in any relationship we have, even if it's a bad one and even knowing there's more and better out there.

So as you can see, we very much hate losing. Whether that is a bottle of wine, a relationship, or just an old toy from our childhood, if there's the potential to lose it, we place a much higher value on it. We don't like change from the status quo, and the pain of losing something is almost always greater than the gain of getting something. This causes us to be fearful and reluctant to change. This can often stop or deter us from making decisions that change our lives for the better. Next time you're making a decision, keep this in mind. You never know what good can come out of losing something you once valued.

Let me know what you thought about this week's blog post! Leave a like or a comment if you have and feedback, suggestions, or questions. Or you can send me an email at Brainfood@brainfoodblog.com with any inquiries or comments.