What is Loss Aversion?
Loss Aversion is a cognitive bias where the emotional impact of a loss is felt more intensely than the joy of an equivalent gain.
What does that mean? If I lose a $20 bill, I will be much more upset about the loss of the $20 bill than I would be about finding a $20 bill. The pain of the loss far outweighs the perceived benefit of the gain. This is applied to money, time, social status, sentimental possessions, or even opportunities.
According to research, the “torment of loss” can be psychologically TWICE as powerful as the equivalent gain. The discrepancy often motivates the choices we make, leading us to cling to what we already have rather than trying to acquire something new – objects, opportunities, friendships, etc.
This tendency to avoid incurring loss can prevent us from taking even well-calculated risks with potential worthwhile returns.
Financial
We may hold onto failing investments or avoid potentially lucrative opportunities due to fear of failure/loss. This can cause prioritizing short-term security over long-term financial growth, which can backfire down the road (also known as myopic loss aversion).
Social Interactions
Bias can cause us to focus on preserving old relationships – even if they no longer serve us or bring us joy as they once did. FOMO (fear of missing out) or regret aversion may cause us to do things with a primary goal of avoiding later disappointments. Perhaps we will join friends for a late night out at the last minute when there is an important meeting the next day that requires us to be at our best. We may choose to participate even though it isn’t in our best interest.
Social loss aversion can also be a factor in not being transparent – fearing loss of a friendship or feeling shame about what another person might think or how they may choose to exclude us can lead to lies and secrets with them. All because we fear a potential loss of the relationship.
Career
Anxiety surrounding the security of a current job can outweigh the potential benefits of pursuing new opportunities that could provide greater satisfaction and growth, including financial benefits. The longer a person stays in a job, the stronger the bias can become. And this can become a self-reinforcing cycle of loss traps.
Though avoiding danger is important, this mentality might prevent us from implementing innovative solutions or seeking opportunities that are ultimately more fulfilling and/or beneficial.
Why Loss Aversion Happens
Our Brains
- The Amygdala processes fear. Loss aversion activates the amygdala. Our bodies also release fear and stress related hormones thanks to the amygdala. Both our brain and body are automatically programmed to fear loss.
- The Striatum predicts errors and anticipates events, and though it shows activity with both losses and equivalent gains, it lights up more for losses. This unbalanced reaction motivates us to avoid losses more than seeking gains.
- The Insula reacts to disgust and, working with the Amygdala, it encourages us to avoid certain types of behaviors. Like the striatum, it lights up in relation to loss. The higher the prospect of loss, the more activated it becomes – and it is more activated by loss than an equivalent gain, which explains why we are repulsed by losing out.
- Socio-Economic Factors
A complex combination of personal and environmental socioeconomic traits determines our willingness to make decisions involving risk. There are also differences between those in a collectivist culture versus an individual culture, with a collectivist being less loss avoidant because the risk is spread over more people.
Why is This Important?
Many of the most important decisions an individual faces involve weighing potential losses against potential gains. And, though avoiding risky choices can be useful, it can discourage people from logically evaluating situations when the fear of losing out is too intense. This prevents people from making the best decisions possible, choosing to avoid possible failure/loss when the real failure/loss may be missing out on opportunities.
Loss Aversion and Addiction
While research shows that those in addiction are LESS loss-averse related to the impulsive/compulsive nature of addiction and an inability to think through consequences, loss aversion does show up at the point where we engage in recovery. Many addicts stand at the point where they need to decide which path they will take and find that they are fearful of “losing out” on what the addiction provides – or, more accurately, what they perceive it provides. Missing out on “fun” is often cited as a reason to avoid recovery, even when the actual fun of the addiction has long since disappeared, replaced by chaos and negative consequences.
Loss aversion related to finances can also be a factor with addiction. Some addicts are afraid of spending money on recovery. They think, “What if treatment doesn’t work? I will have wasted money.” They fear loss rather than looking at what it costs to not get the help they need.
Loss aversion with regard to time might also play into the addict’s decision. They think, “I don’t want to miss out by spending all my time on recovery work.”
At Seeking Integrity, we hear these fears from both potential and actual clients quite often.
How to Avoid Loss Aversion
Framing
The way that a transaction or situation is framed can significantly influence the perception of loss aversion. Phrasing a question by asking about potential loss tends to increase loss aversion. Reframing the question to highlight potential benefits can help reduce loss aversion.
Putting Loss into Perspective
Asking what the worst possible outcome is if the course of action were to be taken can help put the loss and the strong associated negative feelings into perspective. With that, a person can better identify if it is worth moving forward.
Loss Aversion and AI
While it is not a good idea to use AI to dictate every decision, AI can help with loss aversion. This is because AI does not overly weigh potential losses versus gains. Instead, it is able to look at the data objectively, which can be helpful for those who struggle with loss aversion.
Final Thoughts
Though it isn’t helpful to live in regret, it can be helpful to look at when our fear of loss prevented us from moving forward on a different path (and perhaps missing out on something). If loss aversion is persistent, even with the advice provided above, professional help can open doors to opportunities that you might not have even imagined.
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If you or someone you care about is struggling with sex, porn, or substance/sex addiction, help is available. Seeking Integrity offers inpatient treatment for sex, porn, and substance/sex addicts, as well as low-cost online workgroups. At the same time, SexandRelationshipHealing.com offers a variety of free webinars and drop-in discussion groups, podcasts, and more.