bettyosias One of the most powerful but yet ignored biases is loss aversion. Everyday, people make bad decisions based on loss aversion. The fear of loss can adversely affect our judgement and decisions. What could have simply been a small casualty can turn have devastating consequences simply because of that fear, loss. It can take from a second to several years to realize that our behavior is simply dictated by loss aversion. How many of us would just take the first exit without a second thought to avoid being stuck in a traffic judged heavy to later on find out that the number of red lights on the other way still caused you to be late at work? Memories are also linked to loss aversion when we look at all those items we stick to and won’t let go. If you’d go home tonight and look at your closet, garage and basement, how many things are kept years after years hoping to use it again soon but never do? We simply don’t want to let go the memories attached to an old pair of jeans that doesn’t fit anymore because it reminds us of a smaller waist size and the memories of what we perceived as a better “us”. Like letting it go would mean that we’ve stopped being healthy!
In economics, loss aversion is important to understand price changes and consumer responsiveness to it; money related decisions, loans and debt as well as spending patterns, etc. Some wealthy people will keep increasing their debts to keep up with the Jones rather than accepting that the reality.
A straight A student will take the risk to cheat on an exam to avoid a bad grade even though the consequence of getting caught cheating is much, much higher than the one time bad grade. The list goes on.
We are all victims of loss aversion one way or another. But are we aware of it?