A concept · How People Actually Work · Biases
Loss Aversion
A loss hurts about twice as much as a gain delights.
Someone offers a coin toss: heads we win 150 pounds, tails we lose 100. The maths says take it. Almost nobody does. The same week we pay for an extended warranty on a kettle, and we keep the phone plan we have rather than switch to a cheaper one that might, possibly, be worse. None of it is stupid. All of it points the same way. Why does a possible loss weigh so much more than a possible gain of the same size?
What Loss Aversion means
Loss aversion is the finding that a loss hurts about twice as much as a gain of the same size pleases, so we demand a much bigger upside before we will accept any downside. That is the whole definition. Owning it is different from knowing it. We start to notice when a choice is being made by the fear of what we might give up rather than by what we would actually pick if we were starting fresh. We stop paying for cover against small losses we could easily absorb, and we stop treating the current arrangement as safe just because it is current. Before, a change that was probably better still felt like a risk. After, we ask what we would choose if neither option were already ours, and answer that instead.
Not to be confused with
Loss aversion is not the sunk cost fallacy. Loss aversion is about a loss we might take next; sunk cost is about money already gone. We fall for the second partly because of the first, but a fair bet refused today has no sunk cost in it at all.
Loss Aversion examples: where it shows up
- At work: a change with a good chance of improving things is turned down, because the smaller chance of making them worse looms larger than the likely gain.
- With money: we insure the small stuff, refuse fair bets, and keep the share that has fallen while selling the one that has risen.
- In the news: a campaign about what a policy would take away beats one about what it would give, and every side knows it.
Where it sits
Concept 1 of 5 in How People Actually Work, a journey in the course How the World Works.
See where Loss Aversion sits on the sky →
Nearest on the sky
- Anchoring
- Cognitive Dissonance
- Commitment Devices
- The Dichotomy of Control
- Diminishing Returns
- Disposition Effect
A filled dot marks a star that is already open to walk.
Knowing it isn't owning it.
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