Loss Aversion has a Hidden Cost
“In human decision-making, losses loom larger than gains.”
– Kahneman & Tversky (Prospect Theory)
In economics and decision theory, loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains. (Wikipedia).
Simply put, losses have the same psychological effect as pain and have twice the impact of gain (pleasure). Our brains are wired to avoid pain. This affects the decision making process without our being conscious of it. The ramifications can be devastating. It leads to risky behavior.
The loss averse person attempts to avoid loss at all costs. But what are those costs? (more…)